Romania’s central bank raises the key interest rate to 3%, predicting higher inflation.
On Tuesday, Romania’s central bank raised its benchmark interest rate by half a percentage point to 3%, predicting that inflation would rise faster than expected due to the conflict in Ukraine, which is putting pressure on food and fuel prices.
Inflation is expected to outstrip a previous forecast in the short term, according to the bank, because higher commodity prices will outstrip a government subsidy scheme for energy bills that is valid until March 2023.
In February, the bank predicted that rising energy prices would push inflation into the double digits in the second quarter, with a year-end forecast of 9.6 % .
“Uncertainties and risks surrounding medium-term prospects have nevertheless increased significantly as a result of the war in Ukraine and the associated sanctions, which are posing a new sizable supply-side shock globally,” said the bank, which will release new forecasts in May.
After five consecutive increases since October, Romania’s benchmark rate remains the lowest among its regional peers, as policymakers must walk a fine line between containing inflation, which rose to 8.53 % in February, the highest level in 14 years, and fueling a widening current account deficit.
As a more flexible means of tightening policy, the bank has used money market liquidity controls. On Tuesday, the bank also increased its lending facility rate to 4% from 3.50% and its deposit rate to 2% from 1.50%.
The bank stated that the Romanian leu was quasi-stable after a more modest depreciation than elsewhere in the region following the start of the Ukraine war, which was supported by its liquidity management. The unit (EURRON) was unchanged against the euro on Tuesday.
“Higher global interest rates, as well as Romania’s current account deficit… will put pressure on the currency, and we expect the central bank to allow a gradual depreciation,” Capital Economics said in a research note.
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Brainard said she expects methodical interest rate increases and rapid reductions to the Fed’s balance sheet to bring U.S. monetary policy to a “more neutral position” later this year.
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