Analysts count on a constant 7 percent key interest rate

Monetary policy relaxation stands still, since a reduction in minimum reserve requirements is out of the question, although the inflation burst in August set the prerequisites for an increase in the monetary policy rate. BNR operated four consecutive cuts of the key interest rate, from 8.5 percent to 7 percent. Maintaining the current interest rate level is natural since inflation is set to be 4.7 percent by year-end, and the national currency, the main ally in the fight with prices, is inauspicious.

“Our scenario foresees the maintaining of the monetary policy rate to 7 percent until the middle of next year, in spite of existing inflationist pressures,” said UniCredit Tiriac Bank’s Senior Analyst, Rozalia Pal. The 0.86 inflation span in August could cause problems in managing the monetary policy in order to keep it within target. In this context, BNR will not cut the interest rate. “Chances for its increase are low, only 15 percent,” said BRD Analyst Florian Libocor.

Financial experts are skeptical about potential effects an increase in the monetary policy rate could have in tempering price increase. An announce by BNR Governor, Mugur Isarescu, about an increase of the key rate in today’s meeting would mean either that cuts BNR operated this year were hasty or that economic environment changed significantly, which is likely to send negative signs to he market, according to Ionut Dumitru, Chief of Macroeconomic Research Department Raiffeisen Bank.

BNR was expecting an inflationist shock, and it reviewed the inflation forecast for this year from 3.7 to 3.9 in the last inflation report. For Q4, BNR officials take no account of a new shock, but analysts’ forecasts indicate greater inflation pressures in the context of price increases for foodstuffs, gas and RON devaluation. Under these circumstances, a monetary policy rate rise by 0.5 percent, up to 7.5 percent, is possible in the February 2008 board meeting, according to ING Bank’s Chief Economist, Ciprian Dascalu.

Although the ING prognosis shows a stable monetary environment regarding main indicators, Dascalu said inflationist pressures would justify an increase. More skeptical, BRD’s analyst calculated a 90 percent probability for a key rate increase during next month’s BNR board meeting.

Outlook 
A monetary policy rate rise by 0.5 percent, up to 7.5 percent, is possible in the February 2008 board meeting,