Romania’s Central Bank wants a firmer grip on inflation

Inflation will continue to increase by the middle of this quarter, Mugur Isarescu, the Central Bank governor has cautioned. Under the present circumstances, the Central Bank decided to raise the reference interest rate

Mihai Pelin, 07.07.2022, 14:00

Romania’s National Bank has decided to raise by a
point the reference interest rate up to 4.75% in order to get a firmer grip on
liquidity on the currency market and also to keep the present level of the minimum
reserves for liabilities in the local and foreign currencies of the credit
institutions.

The Central Bank’s move has not been anticipated by pundits,
some have envisaged a smaller increase in the reference interest rate though,
as it stood under 2% at the beginning of the year. Governor Isărescu has
pledged that the Central Bank will be using all the instruments available to
keep liquidity under control. According to him, the inflation will continue to
rise at a lower pace by the end of this quarter. And that renders expert
forecasts outdated, mainly because of the price hikes higher than expected.

Mugur
Isărescu: Essential in the worsening of the inflation forecasts are the
higher dynamics in fuel, gas and electricity prices in the following months,
even against the background of the support schemes applied. Worth mentioning are
some basic effects and the prices in processed food mainly due to the stronger hikes
in crude, energy and agri-food products against the background of the war in
Ukraine and the sanctions entailed. Additional inflationist effects are
expected on the segment of the selling costs, spurred by the higher prices
applied by the railway company CFR, as well as the tobacco prices due to the
increased excise.

Under the present circumstances, the Central Bank
has raised the reference interest rate in an attempt to keep prices at bay. Governor Isărescu has explained that given the present
situation, central banks must find a balance between fighting inflation and the
risk of bringing economies to recession. In his opinion, it is vital that
resources, represented by the EU funds made available to Romania, be capitalized
upon properly, including those conditioned by the implementation of reforms.

The reference interest rate is very important being largely
employed by natural persons, companies, banks at the level of the entire
economic system. For instance, banks refer
to it whenever they give loans to clients, natural persons and companies. The
loan cost fluctuates according to the reference interest rate and as it went up
lately it dealt a heavy blow to those with credits in the national currency.
There are also solutions and experts recommend refinancing and opting for a
fixed interest rate. On the other hand, inflation rate in May this year stood
at 14.5% and experts believe the Romanians are in for more price hikes in
products and services in the following months.

(bill)