Romania Unexpectedly Raises Rates for First Time Since 2018

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Romania unexpectedly raised interest rates for the first time since 2018, following nearby countries that are already locked in a battle with surging prices.

The central bank on Tuesday increased benchmark borrowing costs to 1.5% from 1.25% -- as predicted by only four of 12 economists surveyed by Bloomberg. The rest saw no change. 

The leu was 0.1% stronger against the euro shortly after the decision was announced.

The move aligns the eastern European country more with the likes of Hungary and the Czech Republic, where aggressive monetary tightening has already begun. Romanian inflation is already the fastest among those nations and central bank Governor Mugur Isarescu has struck a more hawkish tone.

“The current assessments indicate the outlook for the annual inflation rate to rise over the short time horizon to significantly higher values than those anticipated previously, under the impact of supply-side shocks,” the bank said in an emailed statement. 

“Determining factors are the renewed large hikes anticipated for energy prices, particularly of natural gas, owing to the surge in domestic and European wholesale prices and, to a smaller extent, in fuel prices,” it said.

Some analysts thought there were grounds to wait: Romania is enduring its highest daily Covid-19 infections of the whole pandemic and, with the European Union’s second-least-vaccinated population, the fear is that worse is still to come.

What’s more, a political crisis that’s been dragging on for weeks has sent the leu to a record low against the euro. Prime Minister Florin Citu was ousted Tuesday in a no-confidence vote in parliament.

But inflation, which is projected to climb to 5.6% by year-end, spurred the central bank to act. Economic expansion, meanwhile, is forecast to be among the continent’s quickest in 2021.

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