The Transylvanian Take on ECB Policy

Romanian bank predicts ECB will start raising interest rates in early 2018
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What's the distance between Frankfurt and Cluj-Napoca, Romania? 1300 kilometers, or 130 basis points.

That's the gap between the median forecast on where the European Central Bank's deposit rate will be by the second quarter of 2019, and the most divergent forecast in a Bloomberg survey.

It comes from Andrei Radulescu, an economist who watches the ECB from the forested mountains of Transylvania. He predicts borrowing costs will rise as early as the first quarter of next year – notwithstanding ECB President Mario Draghi’s assertion that rates will remain low for an “extended period of time.”


For the euro area, at a time when the path ahead for policy is becoming even more hotly contested, it can be worth keeping an eye on the outliers.  Romania doesn't use the euro.

In March 2016, when the ECB cut the benchmark rate to zero, no one forecast the move. In September 2014, when the ECB reduced the benchmark rate to 0.05, only six out of 57 economists predicted the change. 

Radulescu, Banca Transilvania's senior economist, sees himself in that club. 

“I'm independent, I've always been independent and many times out of the consensus – and beating the consensus in the positive sense,” he said in a phone interview from Cluj-Napoca. “If the economy presents an evolution around potential and inflation gradually converges, it’s a very good period for the ECB to start the normalization cycle,” he said. 

Ignoring a small blip in 2011, interest rates in the 19-nation euro area have been on a downward trajectory for more than eight years. That’s not supposed to change until a 2.28 trillion-euro ($2.4 trillion) bond-buying program -- currently set to run until December – comes to a close.

The Romanian economist sees consumer-price growth in the region averaging 2 percent this year and next, before slowing to 1.9 percent in 2019. The forecast underpins his prediction that the ECB's deposit and refinancing rates -- currently at minus 0.4 percent and zero respectively -- will rise once every three months in quarter-point steps from this time next year through mid-2019.

Radulescu is not the only economist with unconventional forecasts. Societe Generale's Michala Marcussen expects the ECB might taper QE as soon as June, bringing the program to a full-stop by early next year. Less dramatic, but still out of consensus is SMBC Nikko Securities' Yoshimasa Maruyama, who sees a deposit-rate hike by the second quarter next year, twelve months ahead of the median forecast.

A final reason for the ECB to raise rates sooner is that the usefulness of its policy will decrease over time if the U.S. tightens faster, prompting investors to seek higher returns abroad, Radulescu says. 

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