Romania’s central bank may tighten broad monetary policy sooner than expected this year to counter rebounding inflation, provided its measures do not fuel a rise in the leu currency, Governor Mugur Isarescu said.
The central bank expects inflation to rebound from negative territory by June, and rising consumption and heavy public spending ahead of two elections this year could add upward pressures, Reuters reported.
Consumer prices fell 2.1% in January, less than market expectations of 2.7%, and the central bank has forecast inflation will reach 1.4% at the end of this year and as high as 3.4% by end-2017.
As a result, Romania’s central bank may become the first in the region to start monetary tightening, not by raising interest rates but by narrowing the gap between its benchmark and market rates.
But it needs to time such a move properly to avoid standing out in a region still in easing mode and that has attracted a lot of the cash made available by European Central Bank stimulus.
“Our inflation forecast was in line with the (January) figure, that is why I have said we may react on monetary policy sooner than the quarterly inflation report in the fall,” Isarescu told Reuters in an interview.
He said policymakers had a wide range of tools to choose from–positive interest rates, high minimum reserve requirements for commercial banks’ liabilities, and a gap between its benchmark and money market rates.
A reaction would likely come in the form of narrowing the corridor between its lending and deposit facilities, which would in turn impact interbank rates.
Isarescu said there was a “high probability” the bank would narrow the corridor this year, but under certain conditions.
“We do not want to boost the leu currency through our measures,” he said. “There is no need for that, for...the past one and a half or two years we have felt it is in a fair and sustainable area.”
“There is that risk, we don’t want it to materialize so we must see how to manage it.”
Earlier this month, the central bank kept its benchmark interest rate on hold at a record low 1.75%. Isarescu said there would be no more cuts, although market rates could still fall given low inflation.
“We may have capital inflows, in which case the rate is sufficiently low with the current corridor, or we may have capital outflows and then the rate is sufficiently high with a narrowing of the corridor.”
Isarescu warned higher government spending that could stimulate consumption or “uninspired” legislation, such as a draft bill that would enable all Romanians to give up their mortgaged properties and stop paying loans could trigger capital outflows.
