Romania Takes Bolder Step, Raising Key Rate by 100 Basis Points
Romania raised its benchmark interest rate by a full percentage point — more than forecast — as the country sought to catch up with eastern European peers who have battled inflation with a sweeping round of hikes.
(Bloomberg) — Romania raised its benchmark interest rate by a full percentage point — more than forecast — as the country sought to catch up with eastern European peers who have battled inflation with a sweeping round of hikes.
The central bank raised the key interest rate by 100 basis points to 4.75% on Wednesday, the largest one-time move since the financial crisis in 2008. Four of 10 economists in a Bloomberg survey predicted the move, while the rest forecast an increase of 75 basis points.
While Romania has gradually stepped up its efforts to contain inflation running at the fastest pace in almost two decades, it has refrained from the types of outsize rate increases made by its neighbors due to concerns over economic growth.
Those moves include the Czech Republic’s 125 basis-point hike in June, a 75 basis-point move in Poland and rapid increases in Hungary that have brought that country’s key rate to 7.75%.
The war in neighboring Ukraine is taking an economic toll by increasing budget spending as Romania shelters refugees, curbing the $250 billion economy’s exports and driving energy prices higher. Before the Russian invasion in February, Romania had shown a more cautious approach to monetary tightening, increasing borrowing costs by only 250 basis points over the past year.
The fact that Poland’s central bank will be meeting tomorrow likely favored “a bigger move by the Romanian central bank today to avoid looking like it is behind its peers,” ING economists led by Chris Turner said before the decision. “Romania has the lowest interest rates in the region, while inflation is very likely to exceed 15% in June, which should be the peak. However, we do not expect a rapid slowdown in inflation.”
Inflation is poised to remain in double digits until at least the second quarter of next year, according to the central bank. While Romania’s economy grew 6.5% in the first quarter, the energy-price spike and supply-chain disruptions will probably hurt local businesses and household consumption in the coming months.