Romania’s central bank opted on May 13 to keep the policy rate (chart) at 7%, despite analysts expectations that it would make the first rate cut of the anticipated policy easing cycle.

The decision marks not only a mere deferral of the easing cycle, but a deeper change in the central bank’s rhetoric, more in line with the slow but constant deterioration in the fiscal and external landscapes. This doesn’t mean a rate cut is unlikely in June, but that the amplitude of the easing cycle this year may be smaller — 1 percentage point (pp) at most — and less predictable.  

Previously, a small majority of analysts — four out of six — surveyed by Bloomberg had said they expected a cate cut on May 13. 

Announcing the rate decision, the National Bank of Romania (BNR) stressed the importance of the use of EU funds and implementation of Resilience Facility targets as elements that are going to be relevant, besides the simple dynamics of inflation, in future monetary policy decisions.

The move was thus not totally unexpected and in fact, was preceded by rhetoric from both central bank officials and analysts pointing to the growing concerns prompted by the expansionist fiscal policy this year leading to fiscal corrective measures after the elections — both episodes posing inflationary threats.

The central bank outlined in its press release all domestic and external concerns circulated on the market and noted that the CORE inflation eased less than expected during the first quarter of the year (to 7.1% y/y in March from 8.4% y/y in December).

Overall, the no-change policy decision contributes to consolidating the central bank’s rhetoric, which is essential in fighting the expected inflation, while not entailing significant costs in terms of economic growth, financial intermediation or public financing — all these elements are already constrained by other circumstances.