Romania Holds EU’s Highest Key Rate as CPI Pressure Builds

(Bloomberg) -- Romania maintained the European Union’s highest benchmark interest rate as policy maker’s caution over the threat of Covid-19’s delta variant outweighs concern about accelerating inflation.

Rate-setters in Bucharest decided to hold the key rate at 1.25% for a fourth meeting on Friday, matching the estimates of all economists in a Bloomberg survey. They also signaled a shift to “tight” control of the money-market liquidity in a first change in language that points toward a tighter monetary policy.

With consumer prices shooting up at the fastest pace in 1 1/2 years in June, the central bank may soon follow nearby Hungary and the Czech Republic in lifting borrowing costs as well.

“The current scenario shows a higher path of the projected annual inflation rate over the next two years, with the indicator being again revised considerably upwards in the short term and to a lower extent in the latter part of the projection horizon,” the central bank said in a statement.

Governor Mugur Isarescu, who has struck a more hawkish tone of late, will present an updated inflation forecast next week.

“The central bank acknowledges the rise in prices and the new inflation forecast is likely to signal a higher CPI trajectory over the remainder of this year and in 2022,” said Ioan Mincu, an economist at BRD-Groupe Societe Generale.

Liquidity controls are the bank’s “weapon of choice” at the moment, according to Mincu, who predicts a 25 basis-point rate increase in first quarter of 2022.

Read more: Romanian Inflation Quickens to 18-Month High After Rates Held

If Romania can safely navigate the next stage of the pandemic, there’s a case for tighter monetary policy: The economic expansion is forecast to be among the continent’s quickest this year. GDP growth in the second quarter is expected to be at a “significant two-digit” level, according to the central bank. Inflation already exceeds the official target range.

But the central bank has historically been careful not to push rates too far above those in the euro area for fear of destabilizing the national currency and attracting speculative capital.

The virus, meanwhile, casts the longest shadow. With the delta strain now Europe’s most dominant, Romania has only inoculated 5 million of its 19 million population -- a goal it reached two months late.

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