In Romania inflation to remain above upper limit of target interval

Latest developments indicate that the annual inflation rate will remain above the upper limit of the target interval (2.5%+/-1pp) in the short term, said the central bank in a release, explaining its decision to hold the monetary policy rate at 2.5%. Also, inflation will be higher than estimated in the latest medium-term forecast, published in the February Inflation Report, signaling it might very probably revise upwards its inflation forecast for 2019.

Risks to the inflation outlook stem from the government’s fiscal and income policy, labor market conditions, the growth pace of the euro area and global economy, international oil price developments, monetary policy stance of the ECB and of central banks in the region and the effect of Brexit. In addition, the NBR emphasized a persistent source of concern coming from the evolution of the CA deficit.

Nonetheless, in spite of a higher-than-expected inflation acceleration, the NBR decided to keep the monetary policy rate on hold, at 2.5%. At the same time, the monetary authority committed to a strict control over money market liquidity, which is in fact a form of monetary tightening, according to NBR Governor Mugur Isarescu’s declarations. Further on, banks will probably sense market liquidity shortages and act accordingly by hiking rates, which is also a tightening movement. Basically, times of low rates and excess liquidity have passed, Isarescu underlined. Besides, the NBR will use liquidity management to avoid amplifying tensions on the currency exchange, he also said.

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