Battle Against EU's Fastest Inflation Forces a New Rate Hike

(Bloomberg) -- Romania raised interest rates after a pause last month as it battles the European Union’s fastest inflation.

The central bank increased benchmark borrowing costs to 2.5 percent from 2.25 percent on Monday, matching expectations of a majority of analysts in a Bloomberg survey. It’s the third increase in 2018 as the bank seeks to tame the steepest surge in consumer prices in five years.

“Short-term inflationary expectations are on the rise, and the new scenario for inflation reconfirms the trend,” Governor Mugur Isarescu said in Bucharest, adding that the new inflation forecast is “almost similar” to the previous one. “We’re fighting with all of the weapons at our disposal to anchor expectations. I’m sure we’ll tame inflation without going too high with the key rate.”

Battle Against EU's Fastest Inflation Forces a New Rate Hike

The EU’s second-poorest nation is enjoying a consumer-led boom, and the National Bank of Romania has responded by joining its counterpart in the Czech Republic in raising rates. Policy makers in other countries, such as Poland, are pledging to refrain for now, particularly as economic activity slows in the euro area, the biggest trading partner for Europe’s ex-communist east. Isarescu has said Romania is taking a “gradual approach” aimed at preventing sharp gains in the leu.

The currency gained 0.1 percent against the euro after the decision, bringing this year’s advance to 0.3 percent, according to data compiled by Bloomberg.

Consumer-price growth reached 5 percent from a year earlier in March, significantly exceeding the upper end of the central bank’s 1.5 percent-3.5 percent target range. Gross domestic product -- fueled by tax cuts and state wage hikes -- may expand 4.5 percent in 2018, according to the latest forecast from the European Commission, which sees inflation of 4.2 percent.

“With inflation inching higher, the central bank can’t afford the credibility cost of doing nothing,” said Ciprian Dascalu, a Bucharest-based economist at ING Bank NV. “This hike might be followed by a long data-dependent pause.”

Isarescu reiterated that the era of very low interest rates has ended but the central bank won’t increase the key rate “too much.” Romania will follow the example of other countries in Europe and keep the key rate below the inflation rate, probably at a 2 percentage points difference one from the other, he said.

©2018 Bloomberg L.P.