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Financial News: Romanian Central Bank Likely To Tighten Monetary Policy

Romanian Central Bank Likely To Tighten Monetary Policy Further

11/10/2017 - 09:20:00 (RTTNews)

(RTTNews) - The Romanian central bank's recent decision to raise its overnight deposit interest rate suggest a move to tighten monetary policy further in the near future, Liam Carson, an economist at Capital Economics, said.

The National Bank of Romania kept its key policy rate at 1.75 percent, on November 7.

However, the overnight deposit rate, which forms the floor of the central bank's interest rate corridor, was raised from 0.50 percent to 0.75 percent.

"The hawkish post-meeting press statement supports our view that interest rates are likely to be raised by more than most expect over the coming quarters," the economist noted.

Until recently, the banking sector had a large surplus of liquidity, which was sterilized via the deposit facility.

As a result, interbank rates were much closer to the deposit rate than the policy rate.

But, in late-September, the government requested that state owned enterprises transfer their dividends to the state budget, reducing the volume of deposits in the banking sector.

"One-week interbank rate have risen and now stand at around 1.20 percent," Carson observed.

Although this is above the deposit rate, it is still below the policy rate.

It denotes that some surplus liquidity still remains in the banking sector and that banks are continuing to use the deposit facility to sterilize excess liquidity .

Citing the hawkish post-meeting press statement, Capital Economics expects more tightening lies in store over the next year.

The statement highlighted bank's increased concern about the build-up of external imbalances amid the recent deterioration in the current account balance.

Looking ahead, the central bank now expects inflation to climb towards the upper limit of the 1.5-3.5 percent target range in the coming months.

Capital Economics also anticipates that inflation will rise sharply in coming months.

With the economy operating at full employment, strong domestic demand will cause core price pressures to build further.

"We think the first hike to the policy rate will come at the next meeting in January, before being raised to 3.50 percent by end-2018," the economist predicted.

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