The National Bank of Romania (BNR) still needs to come up with more interest rate hikes, in the context of high inflation, BNR Board member Cristian Popa stated in an interview with Profit.ro.

"We cannot let inflation become rampant. That is why we must act. The increase in interest rates affects those with loans, but inflation affects all Romanians. We need to think that this inflation needs to be solved. It is more difficult to raise interest rates than to lower them,” he stated.

The BNR raised the key interest rate by 1pp to 4.75% at the latest monetary policy meeting held in July.

The hike was larger than expected by analysts, who had expected a rise of 0.75pp, based on the central bank’s more cautious approach and not the obvious need for higher rates.

BNR will hold its next monetary board meeting on August 5. The minute of the last meeting reflected board members' concern with the fragile growth.

In the meantime, however, the state forecasting body revised the GDP forecast upward for 2022 (to 3.5% from 2.9%), and the European Central Bank (ECB) operated the first rate hike in over ten years.

BNR will probably come up with another rate hike on August 5 - most likely a 0.75pp step that would bring the refinancing rate to 5.5% - closer to the rates in Poland (6.5%) or the Czech Republic (7%).

But the monetary policy cannot indefinitely compensate for the lack of fiscal consolidation as long as the public deficit is wide and structural in nature, BNR’s Popa added.

"The fiscal problem is major in Romania, and it comes from the public sector. There are structural problems when 80-90% of state revenues go to fixed expenses," he explained.

The costs of the “cap and subsidy” scheme used by the Government to mitigate the effects of the high energy prices have not yet surfaced in the public deficit, “and this is a concern for us,” the BNR official said.

(Photo: Sureeporn Teerasatean/ Dreamstime)

iulian@romania-insider.com