National Bank of Romania Increases Monetary Policy Rate to 6.25 pc

The National Bank of Romania decided to increase the monetary policy rate to 6.25 percent per annum from 5.50 percent per annum as of 6 October 2022. This is another attempt from NBR to handle the growing inflation.

In the latest press release, the National Bank of Romania justifies the increase in the monetary policy rate:

The annual inflation rate reached 15.32 percent in August, marginally above the forecast, after having fallen to 14.96 percent in July, from 15.05 percent in June. The increase was almost entirely driven by the continued hike in food prices, including the VFE component, however largely counterbalanced by the decline in fuel prices (amid motor fuel price compensation and lower oil prices), as well as by the base effects associated with developments in energy prices.The annual adjusted CORE2 inflation rate continued to climb at a sustained pace in the first two months of 2022 Q3, albeit slower than in the previous quarters, going up to 10.4 percent in July, from 9.8 percent in June, and to 11.2 percent in August, slightly above the forecast, mainly owing to new rises in processed food prices. Thus, the evolution of this component continues to reflect the effects of large hikes in agri-food commodity prices and higher energy and transport costs, alongside the influences of bottlenecks in production chains. These were compounded by high short-term inflation expectations, the release of pent-up demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.

The National Bank of Romania press release

Moreover, the NBR expects inflation to continue its raising trend in the months to come:

According to current assessments, the annual inflation rate will probably stick to an upward path towards year-end, under the impact of supply-side shocks, yet at a visibly slower pace. Behind the additional worsening of the near-term inflation outlook stand the faster growth rates anticipated over the following months for the prices of natural gas and electricity – inter alia amid the changes made to the electricity price capping scheme –, as well as for food prices. The latter is seen to be influenced by the hefty advance in agri-food commodity prices, owing to the war in Ukraine and the associated sanctions, but also to the protracted and widespread drought in Europe this summer. The impact of these factors will only partly be counterbalanced by the disinflationary base effects anticipated to occur in the near run inter alia for fuels.

NBR press release

This means that, by the end of the year, we could have a monetary policy rate of more than 8 percent per annum, but even this level could prove useless to stop or even slow down inflation in Romania.

This is bad news for both the private and public sectors. The businesses won’t be able to get affordable loans, while institutions and the population will have to drastically save money to cope with the harsh economic and financial conditions.