Romania Holds Key Rate in Surprise Move as Price Risks Remain

(Bloomberg) -- Romania unexpectedly held borrowing costs steady, pushing off monetary easing as the European Union’s fastest inflation ebbs more gradually than policymakers had expected.

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The central bank in Bucharest kept the benchmark interest rate at 7% on Monday, defying the prediction of 10 of 16 economists polled by Bloomberg who expected a quarter-point cut, which would have been the first easing step in more than three years. Six others had forecast no change.

“The short-term outlook will remain slightly higher than previously expected,” the National Bank of Romania said of inflation in a statement.

Governor Mugur Isarescu suggested in February that policy easing could start at the May meeting. But market certainty over a cut has dimmed since, with board member Cristian Popa saying last month that stubborn inflation meant that a reduction in borrowing costs this month “is not at all clear.”

Policymakers in Bucharest have yet to follow suit with regional peers after Poland, Hungary and the Czech Republic began lowering rates last year, though the central bank chief in Warsaw has said rates will now stay unchanged until the end of 2024.

For the Black Sea nation, fiscal risks remain a concern. Prime Minister Marcel Ciolacu’s government has been struggling to reduce a budget deficit that’s expected to reach 5% of economic output this year and may take years to bring it into line with EU guidelines. The country will hold four rounds of elections this year, with growing demands for higher wages and pensions.

Romania’s inflation rate slowed to 6.6% from a year earlier in March, down from a high of more than 16% in late 2022. The central bank targets inflation within a 1.5% to 3.5% range.

The year-end price-growth forecast “will be higher and the inflation rate will decline only marginally inside the targeted band in March 2026,” the central bank said in its statement, adding that the labor market and the increase in wages also represent “significant” risks.

The US Federal Reserve’s warning that interest rates will likely remain higher for longer to bring inflation under control has led to a “less favorable” environment for cuts in some emerging markets, according to Marek Drimal, a London-based strategist at Societe Generale.

For Romania, “domestic developments have argued for monetary policy caution as well, with the elevated momentum in core inflation, signs of additional fiscal slippage, strong household demand and elevated wage growth,” Drimal said. Still, Romania may have room to deliver a 25 basis-point cut in July, he said.

--With assistance from Barbara Sladkowska and Joel Rinneby.

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