Romanian central bank’s dilemma “getting worse”, ING warns

Romanian central bank’s dilemma “getting worse”, ING warns
By bne IntelliNews March 13, 2019

Romania’s headline inflation accelerated to 3.8% y/y in February, significantly above the Bloomberg consensus of 3.45%, complicating the central bank's mission as the government still has not decided on the "greed tax" that limits the effectiveness of monetary policy.

“With inflationary pressures persisting, economic growth slowing, and [National Bank of Romania (BNR)] policy flexibility on rates still limited by the bank levy level linked to ROBOR (which is yet to be amended), the central bank dilemma is only getting worse,” ING analysts wrote in a March 12 comment

“The [BNR] is likely to accept a weaker leu and short-term inflation overshooting its target, perhaps even at the cost of its credibility, as currency vulnerabilities are on the rise. We see asymmetric risks for the leu's outlook and the chances for a sharper adjustment are on the rise.”

The latest projections from Romania's central bank saw inflation at 3.0% at the end of the year, but upward adjustments are likely to address mounting pressures on consumer prices and the exchange rate. On the upside, such moves would ease pressures that have accumulated on the balance of payments and labour market.

The higher prices in January partly reflected the local currency’s weakening, when the market reacted to the emergency decree 114/2018 on the so-called greed tax.

Food prices notably increased above the seasonal pattern, accelerating to 4.5% y/y as of February from 3.8% in January. Prices of non-food goods accelerated as well, but only to 3.7% y/y in February. Services’ fees increased on average by 3.1% over the past year.

ING said that it expects the central bank to revise its year-end inflation forecast towards 3.8% and keep the monetary policy interest rate at 2.5% through the whole year. The bank’s analysts expect the BNR to keep the monetary policy rate on hold at 2.50% for this year, provided some reasonable amendments to the bank levy are adopted.

“Market rates are likely to remain significantly higher to discourage positioning against the leu. The current NBR Board is likely to avoid taking unpopular decisions for the rest of its mandate and the new Board, which will take over in October, is unlikely to change anything at the last meeting of this year on 6 November,” ING analysts say. 

“If anything, the new Board is likely to be even more dovish and open to exploring unconventional policy measures to support growth in targeted economic segments, with Hungary cited as a case study. Due to a totally different current account profile, a dovish stance is likely to burn into FX reserves.”