Sudden and spectacular deficit growth: budget implementation on H1

  At the end of the first half of the year, the general consolidated budget registered a deficit of about RON 15 billion, an amount… Mai mult

World Bank – A scary report that no longer scares anyone: Latest assessment of Romanian emigration

Between three and five million Romanians work and live abroad. The 2017 UN estimate, rated as optimistic by the World Bank’s Report on Diagnosis of… Mai mult

In only one quarter: Incomes increased five times faster than GDP. For public sector employees, even faster

Data released by the INS for the first quarter of 2018 show that households’ living standards increased considerably compared to the same quarter of the… Mai mult

It is the Administrative Code’s turn: little responsibility for local elected officials, higher power for asset disposing, privileges

The Chamber of Deputies votes the amendments to Romania’s Administrative Code on Monday, amendments that strengthen the political control over local administrations. It is expected… Mai mult

Purchasing power declined for second consecutive month: situation by fields of activity

The average gross wage announced by the INS for May 2018 was 4,512 lei, 0.4% lower than in the previous month. Net nominal average wage… Mai mult

“They say what popular vote wants, we say what economy can do”: BNR increases key interest rate

de Adrian N Ionescu , 14.5.2018

The National Bank of Romania (BNR) surprised a part of the market on Monday with the decision to raise its monetary policy rate to 2.5% (from 2.25%).

The increase in the key rate occurred despite the auspices that appeared to be against this event, following last week’s meeting between BNR Governor Mugur Isarescu and the President of the Chamber of Deputies, Liviu Dragnea.

This is the third increase this year, with the other two applied in January, by 25 basis points each, from the level of 1.75% where 2018 started.

The BNR Board of Directors unanimously decided to increase the key interest rate, according to BNR Governor Mugur Isarescu.

“Harmonizing” Government and BNR

At the same time, the BNR continues to support the “harmonization” of the government and monetary policies, according to BNR Governor’s statements made on Monday.

The Government and the Parliament come with the popular vote and say: this is what the Romanian society wants. Can we say the society does not want that? This is a necessity – because of the labour migration, salaries are rising. They say what the popular vote wants, we say how much economy can do. It would good for us to meet somewhere in this discussion!,” said Mugur Isarescu

I am not saying that harmonization is now complete, but we are doing better,” said the BNR Governor, asked about the discussions with the President of the Chamber of Deputies.

“Popular vote” and economy

On the other hand, between the “popular vote” and what the “economy wants”, the natural prudence of BNR intervenes, which, “as any central bank”, seeks to avoid potential, painful adjustments of imbalances, according to Mugur Isarescu’s statements.

“We are more cautious because the demand surplus is not commensurate. You can only say exactly how big it is when it appears, like the litmus test, in the current account balance. At that point, you cannot lie anymore, and then it is a little too late, as there are already a lot of pressures on the exchange rate, the interest rate, and the correction can be painful.”

This is “BNR’s judgment, as well as the judgement of central banks: it is more difficult to correct the demand by cutting it, by raising the interest rates and taxes. That is why we are more cautious so that the society to not make these painful corrections,” explained the BNR Governor.

Where is interest rate heading?

The BNR Governor reminded that “the age – because it was an age, of almost 10 years – of very low and real negative interest rates is gone”.

Normalizing the interest rate, in the “classical sense, that we shall reach positive interest rates, is a process that we cannot shape in the future, but because there are still real negative interest rates in Europe, our interest rate is also below inflation,” added Mugur Isarescu.

Consequently, “those who make judgments like <<we shall raise interest rates in Romania because they must reach the inflation rate>> are wrong, because we shall also maintain a gap, I do not know whether it will be like in Europe, the markets will tell us. There is about two percent gap between the inflation rate and the interest rate there. I do not know if it will be of two percent in Romania as well. For now, it is still of two percent if you look at figures, but this gap will maintain,” the BNR Governor also said.

“That does not mean it will happen what I want to happen, I am not empowered by the Board, but I am the Governor of the National Bank. I would like for this inflation curve, which you will see on Wednesday (in the BNR report on this topic, editor’s note), to go down and the interest rate curve to not be very upward and one day, they will meet at a level very close to what it will be in Europe,” Mugur Isarescu explained.

BNR’s arguments

“The new forecast scenario (on inflation) reconfirms the prospect of a slight increase and capping of the annual inflation rate during the course of some months, above the target range, followed by its return by the end of this year close to the upper limit of the range,” according to BNR.

At the same time, “uncertainties and risks associated with the inflation outlook come mainly from:

  • administered prices,
  • labour market conditions and
  • future evolution of the international oil price.

The economic growth rhythm and inflation in the Eurozone and, implicitly, the conduct of the ECB’s monetary policy and the policies of the central banks in the region are also relevant.

Other milestones:

  • The annual inflation rate continued to rise to 4.95% in March 2018 from 4.72% in the previous month.
  • The advance of the (inflationary) rhythm has mainly been driven by the factors from the supply side, especially the fuel price increase, as well as the core component of the adjusted CORE 2 inflation, whose annual rate continued to rise to 3.0% in March, from 2.9% in February.
  • The advance of the adjusted CORE2 inflation index reflects:
  • pressures from the surplus of the aggregate demand in the economy,
  • increase in production costs (labour, utilities),
  • some influences of Romanian leu exchange rate dynamics, but also
  • the continuation of the upward adjustment of short-term inflation expectations.
  • The negative contribution of net exports to real GDP growth remained unchanged.
  • The deterioration of the balance of goods and services and, consequently, the widening of the current account deficit in the first two months of 2018 compared to the same period of the previous year.
  • Monetary conditions continued to moderate their accommodating nature in April, in the context of the increase in the relevant quotations of the money market and the relative stability of the Romanian leu exchange rate.
  • The annual dynamic of credit to the private sector remained at 6.1% in March. The RON component continued to increase its share in the total credit to 63.6% (from a minimum level of 35.6% in May 2012).
  • The credit provided to the population increased its annual growth (9.4%) with the dominant contribution of consumer credit.

BNR also took the decisions:

  • The increase in the interest rate for the deposit facility to 1.50% per year from 1.25% per year and the interest rate in the lending facility to 3.50% per year from 3.25% per year as of 8 May 2018;
  • Maintaining the current levels of the reserve ratios applicable to RON and foreign currency liabilities of credit institutions.

Banks explain

The BNR decision seems to be far from a concession that casts a shade on the independence of the central bank, especially that tightening the monetary policy is illustrated not only by the increase in the key interest rate but also the increase in the interest rates on deposit and credit (as a last resort) facilities to banks.


“Today’s decision is not a surprise, it seems to me perfectly consistent with the macroeconomic and market context, both local and global.

This decision proves to me that the independence of the National Bank in pursuing its mandate (to maintain price stability in mid-term) is in full use, as it should be normal,” said Horia Braun Erdei (PHOTO), BCR Chief economist for

The decision took on Monday to raise the policy interest was expected even since the last month because of the continued inflationary shocks.

However, BNR preferred to keep the level unchanged and continue to attract liquidity from the market, to stimulate the growth of interest rates on the market.

“We believe that increase in inflation in the first quarter, as well as the oil price evolution higher than expectations, may imply the revision of the inflation target. Even if it will not be reviewed, the current 3.5% target, as well as the upward trend in the CORE inflation (without the administered prices, editor’s note), provides a sufficient basis (for raising the interest rates), according to a note from BCR Research issued last week.

According to Banca Transilvania, the decision to increase the policy interest rate was determined not only by:

  • the high level of inflation (and the importance of anchoring the short – term inflation expectations) and
  • the deterioration of macroeconomic balance, but also by
  • the need to make room for manoeuvre to intervene at the moment of occurring some adverse economic shocks in the economy.
Mergeți în homepage ›

Publicat la data de 14.5.2018

Lăsați un comentariu


Ministry of Finance is drafting a new fiscal framework valid as of January 1, 2019

The Ministry of Public Finance makes a "comparative analysis" of the Tax Code and the Tax Procedure Code with a view to applying a new… Mai mult

Eurostat: Romania and evolution of employee number in public sector in an European context

Romania, Hungary and Slovenia are the member states that recorded the largest increase in the share of public sector employees in the total number of… Mai mult

Fitch confirms Romania's rating at BBB- but warns: fiscal loosening is risky for macroeconomic stability

Fitch Ratings confirmed on Friday Romania's rating for long-term foreign and local currency debt at BBB-, with a stable outlook, but warned that fiscal loosening… Mai mult

"We are working on a tax amnesty mechanism": announcement made by Minister of Finance

Finance Minister Eugen Teodorovici said at a press conference held in Bistrita that "a mechanism of this type is in progress”, a mechanism on tax… Mai mult

AOAR - Economy against new Criminal Code: businessmen denounce excessive protection provided to officials who cause damages to economy

The Businessmen’s Association of Romania (AOAR) asks the ruling coalition to explain the mechanism by which, after changes introduced on Wednesday in the Criminal Code,… Mai mult

Number of insolvencies increased by 12% in first five months. Suspended activities - plus 31%, dissolutions - plus 59%

The increase in the number of companies and PFAs in insolvency was 11.97% in the first five months of this year, compared to the same… Mai mult

Transport infrastructure in Romania needs EUR 70 billion - double as compared to existing resources

The investment needs in Romania's transport infrastructure exceed EUR 70 billion, while the available resources by 2030 are EUR 36 billion, according to the Transport… Mai mult

Refusal to work annuls entitlement to social assistance - bill voted in Chamber of Deputies

Deputies adopted a draft law on Wednesday whereby entitlement to social assistance ceases when a job is refused. The decision, Agerpres announced, was taken with… Mai mult

Subsidy of RON 900/month for employing a graduate based on contracts of indefinite duration

The National Agency for Employment (ANOFM) grants subsidies of RON 900/month to employers who employ graduates of educational institutions, with contracts of indefinite duration, within… Mai mult

C.P. Tariceanu, before the heads of Senates from EU: The European Commission has encouraged the parallel state, in Romania it is like in the 50's

Calin Popescu Tariceanu (foto) delivered a very tough speech on Friday, in the Senate, addressed to the European Commission, which he accused of encouraging the… Mai mult

National Bank of Romania wants to lower indebtedness limit in granting loans to individuals

The National Bank of Romania (BNR) sent to banks for consultation a draft amending Regulation 17/2012, which provides for a consistent lowering of the indebtedness… Mai mult

High impact provisions: Senate has adopted PSD-ALDE amendments to the Code of Criminal Procedure

Senators adopted on Wednesday the draft for amending the Code of Criminal Procedure, by 74 votes for to 28, against. The bill goes to the… Mai mult

RBL: Workforce crisis is worse than economic crisis - 3.4 million Romanians have left the country in last 10 years

Migration is one of the most serious problems facing Romania at this time, along with the lack of infrastructure. However, the return of Romanians to… Mai mult