Tomorrow, the NBR will face its toughest decision of the last two years since it moved to direct inflation targeting - either enter a cycle of price increases for RON lending, or further postpone an interest rate increase, although the 2007 target is clearly compromised, whilst even the 2008 target is threatened. The central bank will be unable to recalibrate the interest rate instrument any sooner than January, when the next monetary policy meeting of the Board of Governors is scheduled.
Still, recent comments from Governor Mugur Isarescu about the possible negative outcome of a rate increase have tempered the expectations of many analysts concerning tomorrow's decision.
"Can we afford to push the monetary policy pedal again and raise new short-term capital by increasing the rate?" Isarescu rhetorically wondered.
Florin Catu, who has resumed his position of chief analyst of ING Bank Romania, believes the NBR will not give in to the pressure created by market expectations and will maintain the rate at 7%. After all, many players have positioned themselves in view of an imminent rate increase. Catu believes that the NBR will compensate for this decision with a more aggressive verbal message and with a more aggressive purging of liquidity to make sure short-term rates stay above the monetary policy rate. Moreover, Catu is also taking into account a rate decline in the medium term, if the domestic and global economic growth deteriorates beyond expectations.
Citi's analysts expect the NBR to raise the rate by half a percentage point to 7.5%, on account of worsening inflation prospects, whilst they anticipate that Hungary, Poland and Slovakia will maintain the current levels.
"The significant worsening of the inflationary prospect and the risks associated with the upper inflation limit for 2007 being exceeded suggest that the strengthening of the monetary policy by raising the interest rate is unavoidable," says Iker Domac, Citi analyst for Romania, Serbia and Turkey.
Still, Citi thinks an increase of only 0.25% cannot be ruled out, considering the recent comments made by the NBR Governor that favoured a moderate reaction of the monetary policy towards the increase in inflationary pressures. Citi estimates a rate of up to 7.75% over the next six months.
Worldwide, every market is keeping its eyes on the Fed's Wednesday decision, with analysts agreeing on the prospect of a 0.25% increase of the reference rate for the US dollar, to 4.5%.
Economic analyst Radu Craciun anticipates that we might see an increase of only 0.25%, due to the current level of the exchange rate.
"Approaching this purely rationally, I believe it would be disastrous for the NBR not to do anything given that its main goal is to target inflation and we will see the target exceeded by a significant margin," Craciun says.
Florian Libocor, BRD-SocGen's chief economist maintains his opinion that the NBR will increase its monetary policy rate by up to one percent during its session on Wednesday.
"Considering the fiscal policy will have a lower and lower contribution to the fiscal-monetary policy mix, I believe NBR will be tempted to take into account a new mix of orthodox and unorthodox measures," Libocor says.
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