Central bank could raise key interest rate by 0.25-0.5 percentage points

In Romania, the decision is to be made in tomorrow’s meeting of the the Board of Directors of the National Bank of Romania (BNR). Most experts polled by Business Standard say a rise in the monetary policy interest rate is likely, as Romania’s inflation risks exceeding BNR’s 4 percent target for this year, plus/minus one percentage point. Inflation in September was 6.03 percent, and is expected to reach 5.5 percent by December.

“We feel BNR should raise the key rate by at least 0.5 percent in its October 31 meeting. This should not lead to massive appreciation of the exchange rate,” according to the head of Raiffeisen Bank’s Macroeconomic Research Department, Ionuþ Dumitru.

ABN Amro’s Chief Analyst, Radu Crãciun, is also considering a 0.25-0.5 percent rise. However, the impact of this decision will be felt only in 2008 and is unlikely to help the central bank’s efforts to keep inflation within the established target.

Analysts are predicting significant inflationist pressures for 2008. This year’s severe drought is driving up prices, which will spur inflation. Experts are therefore indicating that the only way to keep inflation under control is a rise in the key interest rate.

Some analysts are considering, however, the possibility that BNR might maintain the current key rate, because Romania is still facing problems, especially in terms of the current account deficit. The rise in the monetary policy rate could attract speculative capital, leading to a strong appreciation of the national currency and, eventually, to a wider current account deficit. BNR Governor, Mugur Isãrescu, recently drew attention to these risks.

Change 
A rise in the key interest rate would mean a shift in BNR’s strategy, as it successively lowered the rate earlier this year, in four sessions, to the current 7 percent from 8.75 percent at the beginning of 2007.