The National Bank of Romania (BNR) increased the refinancing rate by 25bp to 1.75% on November 9, against consensus expectations for a steeper tightening of the monetary stance.

However, it also widened the symmetric interest rates corridor, consequently rising the Lombard rate by 50bp to 2.5%, which is likely to have a visible impact on the money market rates, while keeping the deposit facility rate at 1%. 

"By widening the symmetrical corridor to ± 0.75 percentage points, from ± 0.50 percentage points, BNR achieved, in essence, another increase of 25bp, in addition to the 25bp increase in the key interest rate,” said ING Bank Romania’s chief economist Valentin Tataru.

This is because, in the current market context, the Lombard rate level — which is now set at 2.50% — is more relevant than the key rate level, he explained.

However, this logic only lasts as long as liquidity conditions remain limited. The government increasing spending toward the end of the year could increase liquidity considerably, diminishing the relevance of the Lombard rate.

The ING Bank economist maintains expectations about further rate hikes that would bring the monetary rate to 3% by the end of 2022.

It was a “cautious” step taken with a view “not to suffocate the economy or threaten the financial stability,” as explained by BNR communication adviser Adrian Vasilescu. The moderate move was in line with the BNR’s policy of avoiding unnecessary steps upwards or downwards, he furthered.

The BNR began the monetary tightening cycle last month, with another 25bp hike.

During the pandemic, Romania’s central bank repeatedly cut the policy rate, halving it from 2.5% to 1.25% in January 2021.

But rising energy prices pushed up inflation around the globe and the BNR had to join the interest rate normalisation process to address the inflation that, expressed in headline terms (CPI inflation), climbed up to 6.3% in September.

The faster increase of inflation in Romania during Q3 was triggered especially by exogenous CPI components, the BNR’s statement released along with the monetary board decision reads, hinting at the reasons that made the monetary board take a milder step. The inflationary drivers were much the same as in the first part of the year.

The BNR’s monetary policy decisions are part of the process of gradual normalisation of the monetary policy conduct that the BNR is carrying out, amid high uncertainties, the same as other central banks in the region.