Hours before Prime Minister Florin Citu’s cabinet fell on October 5, the National Bank of Romania (BNR) raised the monetary policy interest rate from 25bp to 1.5%.
This move triggered the expected start of the interest rate normalization cycle. The rate hike was widely expected, although the timing surprised analysts who expected a rate hike in November.
The sudden deterioration of the political situation in recent weeks has most likely weighed significantly on the decision of the central bank, which applies a regime of controlled floating of the exchange rate.
The BNR has confirmed that the inflation forecast will be revised upwards.
“Current assessments indicate that the annual inflation rate should increase in the short term to reach values significantly higher than previously anticipated,” said the central bank statement.
Rising energy prices will push the inflation rate from 5.25% in August to 7.3% by the end of the year, said Ionut Dumitru, chief economist at Bank Raiffeisen last week. . End-of-year inflation could exceed 5.6%, the latest projection of the monetary authority, also agreed Adrian Vasilescu, communications advisor of the BNR.
The CORE2 adjusted annual inflation rate rose to 3.0% in July, from 2.9% in June, and to 3.2% in August, standing slightly above expectations, the BNR said in its monetary policy decision of October 5.
Higher inflation is the result of a combination of demand and supply side effects – higher prices for some commodities, including agri-food products, and higher energy and transportation costs, the said. BNR.
All major components of aggregate demand have contributed to the sharp acceleration in annual GDP dynamics, although to a considerably different extent, the central bank detailed. The contribution of investment was not among the main drivers, however – a relevant point in the context of the government asserting a major shift in consumption towards investment-led growth. This is not yet the case, suggested the BNR.
The main determinant of recent inflation has been private consumption – although it grew below expectations in annual terms – its contribution being closely followed by changes in inventories.
A positive contribution, although much more modest, was made by gross fixed capital formation, against a backdrop of significantly faster growth in new construction work, mainly due to residential construction work, which offset the impact the notable drop in the dynamics of investment in equipment (including transport equipment).