Under Inflationary Pressure, National Bank of Romania Increases Monetary Policy Rate to 2.0pc

The galloping inflation in Romania makes NBR – National Bank of Romania increase its monetary policy rate from 1.75% to 2%. This is the second time NBR has modified the monetary policy rate in the last few months.

In November 2021, the National Bank increased the monetary policy rate to 1.75% from 1.50%. At that moment, it was the first policy hike since May 2018. Now NBR grows the monetary rate twice in just three months.

Dark clouds seem to come upon the Romanian economy, despite the optimistic projection for 2022. With annual inflation rising to 7.80% in November, it’s hard to believe that the Government will keep inflation at 5.8% in 2022, as mentioned in the public budget for this year.

According to current assessments, the annual inflation rate is likely to rise gradually over the months ahead, under the impact of supply-side shocks, exceeding the values shown over this time horizon by the medium-term forecast last November. Behind the worsening of the short-term inflation outlook stand the expected higher increases in electricity and natural gas prices – even amid the implementation of measures to compensate and cap such hikes – as well as in processed food prices, mainly due to the advance in energy and agri-food commodity prices. Their impact is likely to amplify and further prolong the positive deviation of the annual inflation rate from the upper bound of the variation band of the target, especially after the measures to compensate and cap energy price increases cease, but also to trigger disinflationary base effects over the longer time horizon.

National Bank of Romania, Press Release, January 2022

Besides, Romania is, along with Turkey, Sri Lanka, and Egypt, one of the countries warned in the last Nomura Damocles Index Report. The Japanese specialists expect Romania to have a severe risk of a currency crisis.

So far, the national Bank behaves as it should in inflation – raising the monetary policy rate to attract money in deposits and make the loans harder to get. Compared to what happened in Turkey, with the Turkish Central Bank decreasing the interest rates, thus contributing even more to inflation, Romania has done what seems proper.

Still, with the gas and energy prices to be completely liberalized in April, when there will be no more subsidies from the Government, Romania will have even more inflationary pressures to face ahead. This makes the NBR’s mission even more difficult in the following months.