Romania Takes Monetary Tightening Action as Inflation Stirs

  • Policy makers trimmed liquidity corridor around key rate
  • Rate increases are likely to follow in 2018 as economy surges

With inflation stirring amid a surging economy, Romania’s central bank has taken its first step toward tighter monetary policy since cutting interest rates to a record low in 2015.

While policy makers left their base rate unchanged at 1.75 percent on Tuesday, they narrowed the liquidity-regulating interest-rate corridor around the benchmark to 1.25 percentage points, from 1.5 percentage points. Another cut in the corridor may come at the next meeting on Nov. 7, according to Governor Mugur Isarescu. The decision to hold the key rate matched the estimates of all 14 economists in a Bloomberg survey.

“The period with very low interest rates is over, and not only in Romania,” Isarescu said, adding that the central bank will take all the necessary measures to prevent inflation from breaching its targeted band of between 1.5 and 3.5 percent. Price growth may accelerate faster than the bank’s current forecast of 1.9 percent this year and 3.2 percent next year, he said.

Isarescu, the world’s longest-serving central bank governor with 27 years at the helm, has been seeking to address strong economic growth at home alongside a weaker expansion in western Europe. That’s now changing as the euro area gathers speed. Romanian interbank rates have hit their highest level in more than two years as investors start to price in inflation that may soon test the central bank’s limits.

“The central bank has been trying to balance conflicting signals from the local and global economies,” said Dan Bucsa, a London-based economist at UniCredit Bank AG. “Headline inflation may rise next summer above the upper limit of the target range. We expect the bank to increase policy rates three times between February and May 2018.”

With money-market rates soaring to the highest level since 2014 amid a liquidity shortage, the central bank pledged to pursue “adequate” liquidity management. At the same time, Finance Minister Ionut Misa, who met the central bank officials before the rate meeting, promised joint efforts to prevent future squeezes.

The bank lent 9.4 billion lei ($2.4 billion) to commercial lenders on Tuesday in the first repurchase operation in two years. Isarescu said the bank will provide liquidity “for as long as needed” and deemed the latest surge as temporary.

The Czech Republic became the European Union’s first nation to raise interest rates in August. Like policy makers there, Romanian rate setters are also keeping tabs on the European Central Bank’s plans to roll back stimulus that’s helped swell emerging-market asset prices. A hike may boost the leu, which has lost 1.1 percent against the euro this year, the worst performance among central and eastern European currencies.

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