NBR's decision to raise the key interest rate on RON for the sixth time in a row, taking it to 10% a year, is making room for a new rise in credit prices, as well as for talks about further raises.
This is the second interest rate increase by 0.25% in a row. Whereas analysts of local commercial banks believe NBR will end its rate raise cycle here, and the next move it will make will be a cut, there are also those on the market who believe otherwise.
The central bank is this way signalling that it remains concerned about the trend of inflation, which could witness new peaks in July, to more than 9%, according to analysts, given the adjustment of controlled prices, from 8.5% in May.
Citi analysts feel NBR's move meets the market's expectations and that additional increases would be necessary to offset inflationary pressures.
"The overheating of the economy and the substantial foreign deficit are arguments supporting the continuation of the rate increase and as such we do no rule out further steps towards this until the end of the year. Stopping the increase at 10% would not have been a prudent strategy," Citi comments.
The analysts of the American bank estimate inflation will go up to 6.8% this year, compared with 6.6% last year, which is worse than indicated by NBR's latest forecast, 6%.
"There are no signs of inflationary pressures weakening. Still, it is uncertain yet whether the NBR will continue to raise the interest rate or not."
Most hopes for an inflation slowdown are pinned on the agricultural yield, deemed as "extraordinary" by the central bank's officials, which should induce price drops for food as of August. In comparison, Romania saw deflation in August 2006 (overall decline in prices), as a result of the significant drop in the price of vegetables.
Even local analysts are now starting to doubt the result of NBR's fight to curb corruption.
"Even though the increase in prices is visible across the entire European economy without being a peculiarity of the Romanian economy, we have to point out a serious issue: in Romania, both mindless consumption and waste have reached unacceptable levels for a functioning market economy," says Florian Libocor, BRD SocGen's chief economist.
NBR Governor Mugur Isarescu himself explained last autumn that the central bank could not achieve the its goal to slow down inflation without support from fiscal and wage policies, which are the Government's responsibility.
"I believe it would be more realistic and at the same time more prudent to talk about falling back into the target inflation band somewhere by the middle of 2010," Libocor adds.
In its latest inflationary projection, published in May, the NBR saw prices slowing down this year to 6% (compared with a 3.8% target) and to 3.5% by December 2009, which is also the target for that period. "I don't think we should see the 10% a year as being a psychological threshold, given that interest on the market has long since exceeded it. That the NBR has reached this interest rate level does not necessarily mean we will see other increases," believes Catalina Constantinescu, senior economist of ABN Amro Bank.
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