Romania Vows Tighter Market Control to Fight Inflation Surge

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Romania extended its era of steady borrowing costs to a year as the central bank vowed to further tighten control of money-market liquidity in its battle with surging inflation.

The central bank has stood pat following three hikes in early 2018, and once again left its benchmark rate at 2.5% on Wednesday, as economists predicted. While consumer-price growth has quickened beyond the tolerance band in recent months as the economy gathers pace, the bank is taking a cue from the dovish turn in the U.S. and the euro area.

“We’re seeing rising inflationary pressures from internal demand and wages, as well the impact of new taxes,” Governor Mugur Isarescu said, adding that inflation will remain above the target band in the next three quarters. ”The market liquidity control was very efficient in April and a bit less in May and we’ll try to fix that.”

Isarescu said that tightening via the money market was equivalent to three quarter point increases in the benchmark. Still, by leaving its rates on hold, Romania joins regional peers Poland and Serbia in taking a wait-and-see approach. The stance differs from that taken in the Czech Republic, which, faced with a similar acceleration in inflation, raised borrowing costs to the highest level in a decade this month.

There’s more than just prices to worry about in Romania. The European Commission sees the budget deficit swelling to 4.7% of gross domestic product in 2020, while lenders are still getting used to a so-called greed tax that was unexpectedly announced late last year.

On top of that, the country is facing two sets of elections in the coming months and the central bank’s board is up for re-appointment.

“Persistently high inflation and the widening current-account deficit warrant rate hikes and a weaker currency over time,” said Goldman Sachs economist Kevin Daly. “But the central bank will continue to try to manage pressures through marginally tighter monetary-market rates rather than outright policy-rate hikes.”

--With assistance from Harumi Ichikura.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net;Irina Vilcu in Bucharest at isavu@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Michael Winfrey, Andras Gergely

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