Romania’s Central Bank Expected to Hold Interest Rates Steady
Analysts predict that the National Bank of Romania (NBR) will keep its interest rates unchanged during the upcoming meeting on Wednesday. This follows a significant rate cut in July, which marked the first reduction in three and a half years. Despite a slowdown in inflation, there are still various price pressures alongside a challenging fiscal situation, leading analysts to believe that the NBR will adopt a cautious stance.
Recent Developments in Monetary Policy
In July, the central bank reduced the key interest rate by 0.25 percentage points, bringing it down to 6.75% annually, the first decrease since January 2021. This decision was influenced by a notable drop in inflation rates over the past year, falling from double digits to 4.9% in June.
Challenges Facing the Economy
Economists argue that the NBR is unlikely to rush into adjusting interest rates based on inflation trends. The deposit facility rate has remained particularly significant for over a year. “While there is room for a potential rate cut in August, we believe that the bank will exercise caution before making further adjustments. This is not a typical cycle of policy easing, and we think that NBR officials will seek more consistency between wage growth, domestic demand, and inflation targets,” stated Valentin Tătaru, Chief Economist at ING Bank Romania.
Influence of Global Economic Trends
Tătaru also emphasized that the NBR’s decisions will depend on the economic context and available data, taking into account the actions of major central banks such as the Federal Reserve, the European Central Bank, and the National Bank of Poland.
Regional Interest Rate Trends
In the region, the Czech National Bank recently lowered its key rate by 0.25 percentage points to 4.5%. The National Bank of Poland made a similar cut of 0.25 percentage points last October, bringing its rate to 5.75% annually. Meanwhile, the Hungarian central bank reduced its key interest rate from 13% to 6.75% starting last fall.
Anticipated Outcomes for the NBR Meeting
Ciprian Dascălu, Chief Economist at BCR, anticipates a close decision from the NBR in the upcoming meeting. While inflation has decreased, it is expected to rise again in July to 5.2%, mainly due to increased fuel excise taxes. Nevertheless, BCR expects a 0.25 percentage point cut in the key rate in August, while the median forecast from analysts surveyed by Bloomberg suggests that rates will remain unchanged.
Romanian Automotive Market Experiences Decline
The automotive sector in Romania has witnessed a downturn, with the Duster model continuing to lead sales, particularly benefiting from a robust performance of its latest generation. Analysts express concerns about the economic landscape, noting a significant 30% risk for a potential decision to maintain current policies, especially as fiscal strategies pose considerable challenges to the ongoing disinflation process.
Budget Deficit and Economic Outlook
Mid-year reports from the Ministry of Finance confirmed a budget deficit of 3.6%, against an annual target of 5%. Economic expert Valentin Tătaru argues that the official target has lost its relevance under the current circumstances, suggesting that fiscal policy acts as a major barrier to reducing short- and medium-term interest rates.
Predictions for Interest Rate Cuts
ING forecasts only a modest cut of 0.25 percentage points in interest rates, anticipated during the upcoming November meeting. If a reduction occurs this Wednesday, it will mark the last adjustment for the year according to the Dutch bank’s projections.
Inflation Pressures on Economic Stability
Arguments against lowering interest rates also stem from persistent high inflation rates in the services sector, alongside rapidly rising wages and various inflationary pressures. External uncertainties, particularly the escalation of conflicts in the Middle East, add to the complexities. ING emphasizes that any signs of moderation in consumer behavior must be substantiated, as lending activities remain robust.
Inflation Expectations and Future Economic Growth
On a more optimistic note, ING does not foresee inflation exceeding 5.5% by July, estimating it will approach the current deposit facility rate of 5.75%. This rate has become a critical benchmark in the market amidst a backdrop of high liquidity within the banking system. ING also highlights that weak external demand could hinder Romania’s future economic growth, despite strong internal demand fueled by increasing wages.
Revised Inflation Forecasts and Monetary Policy Implications
The National Bank is set to revise its inflation forecasts, with recent estimates from July suggesting a significant decline in inflation below earlier projections made in May. BCR predicts inflation will settle at 4% by the end of this year and drop to 3.7% by the end of 2025. In light of easing inflation, BCR anticipates that BNR will implement three additional rate cuts this year during its remaining monetary policy meetings, ultimately bringing the key rate down to 6%.
