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Romania raises key rate more than expected to 3.75% as prices swell

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Romania‘s central bank said on Tuesday it will increase its monetary policy rate to 3.75% from 3.00% as of Wednesday due to rampant inflation and the economic impact of the war in Ukraine, according to See News. 

The central bank, BNR, also decided to increase the deposit facility rate to 2.75% per year from 2.00%, and the lending facility rate to 4.75% from 4.00%, it said in a statement after a board meeting on monetary policy.

The existing ratios of minimum reserve requirements for both leu- and foreign currency-denominated liabilities of banks will remain unchanged.

According to the central bank, the updated forecast shows a renewed considerable worsening of the outlook for inflation, as the projected path of its annual dynamics has seen an additional significant upward revision across the entire horizon.

The annual inflation rate is expected to accelerate in the second quarter and decline only gradually in the next four quarters, but more steeply thereafter, due to sizeable base effects and amid aggregate demand surplus narrowing to almost zero, the BNR noted.

As a result, the inflation dynamics is expected to climb considerably above the previously-forecasted levels and will fall to one-digit levels no sooner than the second half of 2023, remaining above the variation band of the target at the end of the projection horizon.

The central bank believes that the determinants of the new inflation outlook are the much higher increases expected for processed food and fuel prices, as well as for natural gas and electricity prices. However, the inflationary impact of the latter will be substantially cushioned until March 2023 by the capping schemes for households’ energy bills, but will strongly manifest afterwards, the BNR added.

The war in Ukraine and the sanctions imposed on Russia also compound considerably the uncertainties and risks to the outlook for economic activity. In BNR’s view, these developments are affecting consumer purchasing power and confidence, firms’ activity, profits and investment plans, and the European/global economy, due to the high risk perception towards economies in the region. 

Romania’s consumer prices rose by 10.15% year-on-year in March, compared to an increase of 8.53% in February, the most recent data from the national statistical office show.

The next monetary policy meeting of the central bank’s board is scheduled to take place on July 6.