BNR raises key interest rate to 6.75%, a new record of the last 12 years

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In its meeting of 8 November 2022, the National Bank of Romania (BNR) raised the interest rate to 6.75% (from 6.25%), a record level since March 2010.

The central bank also decided to raise the lending (Lombard) facility rate to 7.75 percent per annum from 7.25 percent per annum and the deposit facility rate to 5.75 percent per annum from 5.25 percent per annum as of 9 November 2022. It agreed to maintain firm control over money market liquidity, and to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.

“In the meeting held today, 8 November 2022, based on the currently available data and assessments, as well as in light of the very elevated uncertainty, the NBR Board decided to increase the monetary policy rate to 6.75 percent per annum from 6.25 percent per annum as of 9 November 2022. Moreover, it decided to raise the lending (Lombard) facility rate to 7.75 percent per annum from 7.25 percent per annum and the deposit facility rate to 5.75 percent per annum from 5.25 percent, as well as to maintain firm control over money market liquidity. Furthermore, the NBR Board decided to keep the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions,” reads the BNR report.

The NBR argued that its Board decisions aim to anchor inflation expectations over the medium term, as well as to foster saving through higher bank rates, so as to bring the annual inflation rate back in line with the 2.5 percent ±1 percentage point flat target on a lasting basis, in a manner conducive to achieving sustainable economic growth. At the current juncture, a balanced macroeconomic policy mix and the implementation of structural reforms inter alia by using EU funds to foster the growth potential over the long term are of the essence in preserving a stable macroeconomic framework and strengthening the capacity of the Romanian economy to withstand adverse developments.

As for the annual inflation rate that went up in September to 15.88 percent, i.e. above the forecast, from 15.32 percent in August, BNR explained that it was mainly under the impact of continued hikes in processed food and electricity prices, only partly offset by lower fuel prices, amid declining oil prices.

“The 12-month inflation rate saw an increase in 2022 Q3 too, albeit much more subdued than in the previous quarters (from 15.05 percent in June), in the context of the deceleration in the aggregate dynamics of the exogenous CPI components during this period as a whole, primarily as a result of the drop in fuel prices, inter alia following the motor fuel price compensation”, BNR says.

The annual adjusted CORE2 inflation rate continued to climb at a sustained, faster-than-expected pace in Q3, albeit slower than in the first part of the year, going up to 11.9 percent in September, from 9.8 percent in June, owing almost entirely to the new rises in processed food prices. Thus, the evolution of this component continues to reflect the effects of large hikes in agri-food commodity prices and elevated energy and transport costs, alongside the influences of bottlenecks in production chains. These were further compounded in Q3 too by high short-term inflation expectations and the resilience of demand in certain segments, as well as by the significant share of food items and imported goods in the CPI basket.

Annual inflation rate calculated based on the Harmonised Index of Consumer Prices (HICP – inflation indicator for EU Member States) moved up to 13.4 percent in September, from 13.0 percent in June. Furthermore, average annual CPI inflation rate and average HICP inflation rate went up to 11.8 percent and 10.2 percent respectively in September, from 9.3 percent and 7.9 percent respectively in June 2022, remaining however below the levels prevailing in the region and the Baltic countries.

The new statistical data reconfirm the significantly stronger-than-expected economic growth in 2022 Q2, albeit considerably slower than in the previous quarter, down to 1.8 percent from 5.3 percent in the first three months of the year, implying a moderate pick-up in the aggregate demand surplus during this period too.

The slight deceleration in annual GDP growth in Q2 is also reconfirmed, to 5.1 percent, from 6.4 percent in Q1, yet amid a change in the structure of aggregate demand. Thus, during this period, the largest contribution to economic growth came from household consumption, with a modest one, albeit on the increase, stemming from gross fixed capital formation, while the contribution of the change in inventories turned negative again. In turn, net exports made a marginally larger expansionary contribution in Q2, given the further positive differential between the dynamics of exports of goods and services, in terms of volume, and those of imports thereof, both of which saw a slight decrease against Q1. Consequently, the fast annual pace of increase of the negative trade balance posted a mild slowing, inter alia in the context of the relative narrowing of the unfavourable differential between the upward change in import prices and that in export prices, while the annual growth of the current account deficit halved compared to the previous quarter’s average, given also the improvement in the evolution of the primary income balance.

The latest data and analyses point to a quasi-standstill of economic activity in 2022 Q3 and Q4, under the impact of the escalating war in Ukraine and the extension of the associated sanctions. Compared to the same year-earlier period, however, GDP will likely see a significant advance in Q3, on account of a base effect, but with a decelerating increase in private consumption.

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