Photographer: Akos Stiller/Bloomberg

Romania Surprises With First Interest-Rate Hike in a Decade

Updated on
  • Most economists in Bloomberg survey had predicted no change
  • Economy is among EU’s strongest, while inflation is quickening

Romania unexpectedly raised borrowing costs for the first time in almost a decade as inflation bounces back and its economy expands at one of the continent’s quickest paces.

The central bank lifted its benchmark interest rate to 2 percent from a record-low 1.75 percent on Monday, according to an emailed statement. The move was predicted by five of 15 economists in a Bloomberg survey, while 10 saw no change.

“We increased the key rate because of inflation and because we want to anchor inflationary expectations from the start,” central bank Governor Mugur Isarescu told a news conference in Bucharest. “If you fail to act in due time, expectations don’t tend to be anchored and we wanted to avoid that. It’s better to take preventive actions, like we did today, than to risk.”

Romania is following the Czech Republic and the U.K. in increasing borrowing costs, even as Isarescu warns that raising rates before the European Central Bank risks luring volatile foreign capital and denting financial stability. But the central bank has been left with little choice: inflation accelerated to the most in four years in November, while a raft of tax cuts and public-sector pay increases drove economic growth to an annual 8.8 percent in the third quarter.

“While the decision comes as a surprise, the central bank is trying to get on the curve very fast,” Ciprian Dascalu, a Bucharest-based economist at ING Bank NV, said by email. “This is positive for the leu and Romanian debt.”

Money markets have priced in higher rates. The three-month inter-bank offered rate, known as ROBOR, has gained 120 basis points in the past six months and now exceeds 2 percent, the highest in three years. Having missed last year’s rally in regional currencies from Prague to Warsaw, Romania’s leu has gained 0.9 percent against the euro in 2018. The currency erased earlier losses and traded 0.1 percent stronger after the decision.

In its last meeting of 2017, the central bank narrowed its liquidity-regulating interest-rate corridor for a second time in what was seen as a prelude to a rate hike. Isarescu has also voiced concerns over fiscal policies that have confused businesses and triggered warnings from the European Union over the widening budget deficit.

— With assistance by Harumi Ichikura

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