On Wednesday, Romania’s central bank raised its key interest rate by more than expected, predicting that inflation will hit double digits in the second quarter, fueled by rising energy prices, and will remain above goal for longer.
The bank increased its key rate by 50 basis points to 2.50 % , keeping it at the lowest level among its regional peers. It also increased its loan facility rate from 3.00 % to 3.50 % , as well as its deposit rate from 1.00 % to 1.50 % .
Since October, policymakers have given three 0.25 % point rises, favoring a gradual approach and employing firm money market liquidity controls to tighten policy instead.
The central bank must walk a fine line between limiting inflation, which hit 8.19 % in December, its highest level in a decade, and fueling an expanding current account deficit.
On Friday, policymakers are anticipated to disclose updated inflation predictions that reflect a “significant deterioration” in the short-term pricing outlook.
The bank now forecasts inflation to return to its goal range of 1.5 % to 3.5 % in October-December 2023, a quarter later. Inflation is expected to spike in the second quarter once a current subsidy program for residential energy bills expires.
“Thereafter, the annual inflation rate will most likely decline gradually, on a significantly higher-than-previously-forecast course, but will have a reasonably abrupt downward adjustment in the first half of next year, returning inside the variation band of the target in Q4 2023,” it said.
“However, the characteristics of the (energy) assistance schemes are unknown, with any change in their duration and/or substance likely to have a significant impact on both the current and future course of the annual inflation rate.”
Four out of seven analysts predicted a quarter-point increase, with the median projection pegged at 3.25 % by the end of 2022.
“We believe the central bank will opt for another 50 basis point raise at its next meeting, having ramped up the pace of tightening,” Capital Economics said in a note, adding that interest rates will now rise to 3.50 % by mid-2022.
“Clearly, the central bank felt that these developments outweighed its concerns about economic weakness.”
Against the euro, the leu was unchanged.