Romania’s central bank to raise key interest rate to 10% on inflationary expectations, analysts say

Analysts bet on a 0.25 percentage point increase of the monetary policy rate in the June 26 board meeting at the central bank on high inflation estimates fueled by price hikes of electricity and gas.

The key interest rate currently stands at 9.75 percent per year and inflation is gauged to reach and even jump over 9 percent in July.

The main reasons behind a decision to lift the rate to 10 percent are the 8.2 percent better-than-expected economic growth in the first quarter coupled with a surplus of demand over the level estimated by the central bank, the increase of prices for gas, electricity and tobacco and the advance of salaries over labor productivity, economists interviewed by NewsIn said.

On the other hand, a possible hike of the monetary policy rate would be a signal to anchor inflationary expectations, yet effects will be sensed on the market in a few quarters when inflation will start to drop as analysts estimate.

Higher prices would accelerate inflation to 9.5 percent in July

Inflation in Romania will reach a peak of 9.5 percent in July if prices grow as announced, the chief economist of Raiffeisen Bank, Ionut Dumitru said, adding that inflationary perspectives have been deteriorating which will prompt the central bank to lift the key interest rate to 10 percent.

A 10 percent increase of gas prices will reflect into a 0.5 percentage point hike of month inflation in Romania in July, Dumitru told NewsIn, adding that a 5 percent growth of electricity prices will lead to 0.3-0.4 percentage points added to inflation.

He warned that the budget deficit will be a reason of concern if it is widened trough wage concessions as it risks fueling a spiral of prices/salaries.

The budget saw a 0.3 percent deficit of the gross domestic product after the first five months after surplus in the same period last year.

Senior economist with ING Bank Romania also deems that the rate will be increased to 10 percent on inflation peak of 9.4 percent in July. Nicolaie Alexandru-Chidesciuc said the price of gas will be raised 12 percent and that of electricity 3 percent.

"I do not expect significant cheapening of foodstuff before August," he said, adding there are still international pressures on prices for food.

Also, the price of goods on the internal market is not correlated with the external evolution while others, such as wheat, are strongly correlated, the chief economist of the country’s No.1 lender by assets, Banca Comerciala Romana, Lucian Anghel said.

Last week, the statistics director with the central bank, Constantin Chirca, said inflation will stay put in the next months, after hitting maximum level in March, if prices for gas increase 10 percent the most and food stuff prices reduce in June and July.

Some food items, such as fruits or vegetables might cheapen, the investments director with pension fund Interamerican, Radu Craciun, told NewsIn mulling, the key interest rate will be upped 0.25 percentage points.

The central bank has only two months to decide the level of the key interest on several quarters

The key interest rate will most likely be raised to 10 percent and serve as signal in the background of anticipations of new inflation peak in July, Anghel deems.
"The monetary policy meetings in June and July are the last when the central bank can raise the key interest. The level set in July will be the maximum for the next quarters," the chief economist with Banca Comerciala Romana told NewsIn.

The central bank's decision on June 26 will also be influenced by the evolution of the international context considering that petrol reached skyrocketing prices and price hikes for gas were significant.

Moreover, the European Central Bank's president Jean Claude Trichet said the key interest in the Eurozone could hike from 4 to 4.25 percent in the following session. Such a hike would maintain the interest difference with Romania, meaning the leu will not see more support.

The leu would rather react to maintaining the key interest that to raising it

The market already took into account the key interest increase therefore the leu should not hike significantly, analysts deem.

"It is more likely the leu would drop against the euro in the event the central bank maintains the key interst, despite expectations," Credit Europe Bank analyst Georgiana Constantinescu said.

The increase expected in two days would be the sixth. The key interest hiked from 7 percent to 9.75 percent from the end of October last year to present.

The central lender estimates 6 percent annual inflation towards the end of the year but targets 3.8 percent, plus or minus 1 percentage point.

NewsIn