Romania’s central bank on May 13 opted to keep the policy rate at 7%, despite a fragile majority of analysts (4 of 6, under a Bloomberg survey) expecting the first rate cut of the policy easing cycle. 

The decision marks not only a mere deferral of the easing cycle - but a deeper change in the central bank’s rhetoric, more in line with the slow but constant deterioration in the fiscal and external landscapes. This doesn’t mean a rate cut is unlikely in June, but that the amplitude of the easing cycle this year may be smaller (1 pp at most) and less predictable.

BNR also stresses the importance of the use of EU funds and implementation of Resilience Facility targets as elements that are going to be relevant, besides the simple dynamics of inflation, in future monetary policy decisions.

The move was thus not totally unexpected and, in fact, was preceded by the rhetoric of central bank officials and by analysts pointing to the growing concerns promoted by the expansionist fiscal policy this year leading to fiscal corrective measures after the elections - both episodes posing inflationary threats.

The central bank outlined in its press release all domestic and external concerns circulated on the market and noted that the CORE inflation eased less than expected during the first quarter of the year (to 7.1% y/y in March from 8.4% y/y in December).

Overall, the no-change policy decision contributes to consolidating the central bank’s rhetoric, which is essential in fighting the expected inflation while not entailing significant costs in terms of economic growth, financial intermediation, or public financing - all these elements are already constrained by other circumstances.

iulian@romania-insider.com

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