The 0.25% increase in the monetary policy interest rate achieved by the National Bank of Romania is the first step in a series of necessary interest rate increases to balance the effects of the political crisis and rising inflation, according to OTP Bank analysts, informs Agerpres.
According to a bank statement, the increase in the reference interest rate to 1.5% in early October by the NBR is an adaptation to market conditions and the influences of international trends. The recent signs that indicated this evolution were the increase of interbank interest rates and the upward change of the international yield curve, which also increased the risk cost for Romanian assets. At the same time, as European energy prices continue to rise, domestic political uncertainty has deepened, posing a risk to local fiscal consolidation.
“Since the beginning of 2021, and especially since the summer of this year, many conditions have changed. Central banks have begun to assess more closely a steady rise in inflation, and the yield curve for large economies has begun to move upward. higher levels in the US and the euro area are contributing to an increase in risk premiums for emerging market assets, which is pushing up interest rates in Romania and the region on an upward slope. inflation reaching the level of 6.3% at the end of September, and the forecasts indicate a slight continuation of this increase until at least December “, OTP Bank analysts estimate.
They consider that by the end of the year there will be a new adjustment of monetary policy, so that in 2022 the reference interest rate will exceed the 2% threshold.
“There are several reasons to expect rate hikes in the future, but first we must remember that both the US and the euro area yield curves have gradually increased, leading to an increase in financing costs for emerging economies such as Romania “, OTP Bank analysts claim.
These increases make it less and less possible for the appreciation of inflation to be temporary. Logistical bottlenecks and high energy prices will keep inflation at a higher level than initially estimated next year. Then, at the international level, there are expectations that the Federal Reserve will start implementing regulatory measures in November, while in December the ECB could reduce asset purchases.
The analysis also mentions that internal factors point to a higher interest rate. At the end of September, inflation reached 6.3%, and the inflation rate at the end of the year could even reach 8%, if an additional increase in the price of energy for consumers is adopted, given the evolution of the international gas market. . Although most of this growth is not reflected in core inflation, as it is caused by higher energy prices, given the strong economic recovery and decent wage growth, there is a risk that inflation expectations will rise, which could lead to an inflationary spiral. Finally, the risk cost for local assets was also fueled by domestic political uncertainty and fiscal fragility, with Romania having a structural deficit of almost 7%, probably the largest in the EU.
“It is very important to place the NBR’s decision in a regional perspective, in which other regional central banks have started to raise rates long before the Romanian central bank,” OTP Bank analysts say.
The National Bank of Hungary has already increased its base rate by 105 basis points from 0.6% to 1.65%, and the tightening cycle will continue with an increase of 15 basis points. The Czech National Bank has already increased the base rate from 0.25% to 1.5% through two adjustments of 25 basis points and 75 basis points, respectively. And this is just the beginning, because the market expects the Hungarian reference interest rate to reach 3.5% in 2 years, while the Czech reference interest rate could be raised to the 2.5-3% range. In turn, the central banks of Ukraine and Moldova have increased the monetary policy interest rate by 250-300 basis points in the last few months alone. The National Bank of Poland also began to apply measures by raising the reference interest rate from 0.1% to 0.5% in a single step, although this took place a few days after the NBR decision.
According to the analysis, the increase in the reference interest rate for the adjustment and normalization of monetary policy will have a reduced effect on inflation in this first stage, given that it was more of a reaction to the increase in interbank interest rates. Instead, it will help maintain a strong national currency, while also leading to higher interest rates on loans and deposits. Thus, the saving activity will be stimulated and the expenditures will be limited in general, with the effect of keeping inflation under control.
However, OTP Bank analysts estimate that next year inflation will be lower due to the fact that the effect of rising energy prices will be reduced by the second half.
OTP Bank Romania, a subsidiary of OTP Group, is an integrated and self-financed financial services provider. The bank ranks 9th, according to assets, in the ranking of banking players in Romania, since December 2018.
OTP Group has over 70 years of activity in the financial sector in Central and Eastern Europe, while the Romanian subsidiary has accumulated 16 years of presence on the local market. The community of about 40,000 employees serves nearly 16.3 million customers daily in 11 countries.