Starting today, 6 April 2022, the Romanian National Bank has raised the monetary policy rate to 3%, an increase of 50 bps. They have also increased the lending (Lombard) facility rate to 4% (+50 bps), and the deposit facility rate to 2% (+50 bps).
The decision, which was made at the meeting of the Board of the National Bank of Romania (NBR) held yesterday, April 5, 2022, comes on the back of a myriad of different reasons and factors.
First and foremost, is the inflation rate. The inflation rate in February 2022 amounted to 8.53%, an increase over 8.35% in January, and 8.19% in December 2021. The increase was higher than expected and was influenced by the increase in electricity, natural gas, fuel, and food prices.
The increase in inflation itself can be attributed to several factors; the slowdown of economic activity, which was solely on the back of marked deterioration in the performance of the agriculture sector, which again, was influenced by growing energy and commodity prices. Secondly, Q4 2021 GDP declined more than anticipated, due to the inventories falling to a significant negative value, household consumption having only a slightly positive contribution.
Net exports also had a negative impact on the annual GDP growth, as the decrease in the change in imports of goods and services outpaced that of exports. Labour market also experienced mixed development in the recent period. The number of employees economy-wide rose slightly in December and January, while the ILO unemployment increased to 5.7% in December 2021 and remained unchanged in January and February 2022. The uncertainty generated by Russia’s invasion of Ukraine, as well as the retaliatory sanctions following the decision, lead to further uncertainty in the labour market.
Looking over to the financial market, main interbank money market rates increased in February and March, reaching nine-year highs, due to the monetary policy rate hike, as well as the pronounced tightening of liquidity conditions and expectations of a further increase in the key rate. The EUR/RON exchange rate also recorded an upward adjustment, albeit at a more modest rate than in the region.
Due to all of this and many other assessments, the annual inflation rate is expected to increase more steeply in the coming months than what was expected in February, under the impact of supply chain shocks. This will be fuelled by the higher increases expected in energy and food prices. Even govt. schemes, like the one-year cap on electricity and natural gas prices (which should have a deflationary impact), will probably prove to not be enough to offset the inflationary pressure.
Because of all of this, the Board of National Bank of Romania has decided to increase the monetary policy rate to 3%, an increase of 50 bps. They also decided to increase the lending (Lombard) facility rate to 4% (+50 bps), and the deposit facility rate to 2% (+50 bps), as well as maintain firm control over money market liquidity. They also decided to keep the existing minimum reserve requirement ratios on both the domestic and foreign currency-denominated liabilities of credit institutions.
The NBR Board aims to anchor inflation expectations over the medium term, foster saving through higher bank rates, as well as to bring back the annual inflation rate in line with 2.5% +/-1% target on a lasting basis. These decisions will take effect today, 6 April 2022.
