Romania’s Central Bank raised the key interest rate to 4.75% on July 6. This is the highest key rate increase since the financial crisis in 2008.
A sign that a financial crisis is on the way is the key interest increase. It means that the Romanian Central Bank borrows money from other banks in case it falls short of its required reserves.
While Romania has gradually increased its attempts to slow inflation, which is currently growing at its fastest rate in over 20 years, up until July 6, it resisted the disproportionate rate increases made by its neighbours out of concern for economic growth. As inflation is anticipated to continue to soar, the Governor of the National Bank of Romania, Mugur Isarescu, noted that now was the moment to catch up with regional rivals in rate increases.
There’s time still to catch up with peers as the next monetary policy meeting is in less than a month’s time. One cannot rush monetary policy, it’s about taking stable steps, which we will.Mugur Isarescu, Governor of the National Bank of Romania
Romania’s economy is suffering from the war in neighbouring Ukraine, increasing budget spending as the country houses refugees reduces exports and raises energy prices. Romania had adopted a more cautious approach to monetary tightening before the Russian incursion in February, raising borrowing costs by barely 250 basis points in the previous year.
According to Isarescu, the outlook for Romania’s short-term inflation has somewhat deteriorated from the central bank’s prior projection because price increases will continue to rise until the third quarter of 2022. Isarescu also said that uncertainty levels remain incredibly high. According to the most recent forecast, rate-makers predict that at the end of this year, inflation will be 12.5%.