Romania Watch: NBR raises key rate by lower-than-expected 75bp, to 5.5%
NBR increased the key rate by 75bp, to 5.5%, on Friday, less than expected. NBR is using firm control over money market liquidity conditions as a supplementary instrument to increase the restrictiveness of monetary policy stance. We further see the key rate reaching a peak of 7%.
Romania: Several steps still needed to complete the key rate hiking cycle
On Friday, the Romanian central bank (NBR) increased the monetary policy rate by only 75bp to 5.5%, less than both our expectations and market consensus for a larger hike of 100bp. Interest rates on standing facilities were also raised by 75bp (deposit facility interest rate to 4.5%, and credit facility interest rate to 6.5%). Also, the NBR has reaffirmed the commitment to maintain a firm control over money market liquidity conditions.
The quarterly Inflation Report including the updated inflation forecast for the next two years will be released in a press conference due on Tuesday, August 9. In the communique made public at the end of monetary policy meeting, the NBR said that:
“The updated forecast shows the prospects for the annual inflation rate to level off in 2022 Q3 and gradually decline later on, yet on a path revised moderately upwards…. The annual inflation rate is expected to post minor fluctuations in Q3, and then enter a gradual downward path for three quarters, but relatively fast afterwards, falling slightly below the mid-point of the target at the end of the projection horizon.”
This suggests that NBR’s inflation forecast for the second half of this year might be slightly above our current forecast which assumes that annual inflation rate is decreasing during Q3 from a peak of 15.1% reached in June and is on the way to reach 13.5% in December.
One should have in mind that for Romania, the monetary policy rate only partially defines the monetary policy stance. This is because the NBR is also using the control over liquidity conditions in the money market as a key monetary policy instrument. So, because the NBR is using a firm control over liquidity conditions, the money market interest rates are trading at levels substantially above the level of the monetary policy rate. For instance, ROBOR 3-month was quoted today at 8.12%, a level also outpacing those of similar interest rates in Poland and Czechia where monetary policy rates are higher than in Romania.
We further expect the NBR to increase the monetary policy rate to a level of 7%, from 5.5% at the present. Still, we see now the peak of monetary policy rate to be reached one monetary policy meeting later, in January next year instead of November this year. We expect the NBR to increase the monetary policy rate again by 75bp at the monetary policy meeting on 5 October.
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Nicolae COVRIG
Romania Nicolae has 20 years of experience in applied macroeconomic research, working as a financial analyst in the Economic and Sectoral Research Directorate of Raiffeisen Bank Romania. Nicolae is also an associate lector at the Bucharest Academy of Economic Studies, Department of Money and Banking. Previously, he worked as an economist in the Macroeconomic Modeling and Forecasting Directorate from the National Bank of Romania and as an assistant professor at the Department of Money and Banking from the Bucharest Academy of Economic Studies. Nicolae has a master's degree at the Doctoral School of Banking Finance (DOFIN) and a PhD in finance at the Bucharest Academy of Economic Studies. Nicolae is a member of CFA Institute and CFA Romania. He is passionate about macroeconomics and psychology.
In the euro area, key rates expectations have declined. We consider this move and the related decline in German yields as temporary. Inflation is still running hot, leaving central banks in the hot seat. In CEE, the expected economic slump should be confirmed by Q2 GDP data.
The war in Ukraine and (potential) fresh sanctions on Russia (energy price cap) affecting energy supplies remain key for the near-term outlook for the CEE region. Together with the deteriorating situation in the euro area, we expect a significant and larger impact in Central Europe relative to Southeastern Europe. Upside risks to inflation remain but hiking cycles should conclude in the next months or have likely already ended. |