WOOD Flash – Romania macro: NBR begins the tightening cycle with a 25bps hike

The Board at the National Bank of Romania decided to increase the interest rates by 25bps at its meeting yesterday (5 October), vs. the Bloomberg consensus expectations of no change. However, the decision was not a source of surprise for us, as we were expecting the rate hike cycle to begin sometime in the last two meetings of the year, and we have been flagging this in previous months. The base rate was raised to 1.50%, whereas the deposit and lending rates were raised by the same magnitude, to 1.00% and 2.00%, respectively. Yesterday’s statement highlighted that the inflation outlook over the short term will be significantly higher than the bank’s earlier expectations, but it was maintained that supply-side factors will be the primary cause. It was also stated that the aim of yesterday’s move is to bring inflation back to the target (2.5% +-1ppt) and to anchor inflation expectations over the longer term. All-in-all, we read the statement as conveying the same underlying message as before: that supply-side factors will continue to influence inflation heavily going forward and, although it is beyond the control of the MPC, the monetary policy can no longer sit on the sidelines as it risks de-anchoring inflation expectations. The bank has, so far, raised rates by 25bps this year and we expect to see a cumulative 150bps worth of tightening, taking the base rate to 3.00% by end-2023E.