“Next year, we could witness two conflicting moves coming from the central bank. On one hand, we could see a rise in the key rate; on the other hand, the central bank may choose to lower the mandatory reserves on RON liabilities. While the former is solely related to the prospective development of local prices, brisk private consumption, the positive output gap, etc., the latter is linked to the liquidity conditions in the money market. The liquidity in the money market might dry up in early 2016 due to higher government funding needs,” a report of Austria’s Erste Group Bank, owner of Romania’s largest lender BCR, reads.
Inflation is likely to hover in negative territory until mid-2016, before climbing towards 1% in December 2016, according to Erste. “We reaffirm our view, which is consistent with the central bank keeping the monetary policy rate unchanged until late 2016, as the meager inflation will be mostly supply-driven, i.e. the change in the VAT rate. Annual inflation is seen to return to the central bank’s target range of 1.5-3.5% in early-2017,” the report also reads.
In this context, the central bank will probably keep its main monetary policy rate unchanged until the end of 2016. The fiscal relaxation and the economic growth may cause Romania’s central bank to increase its key rate in the fourth quarter of 2016, according to Erste analysts. The key rate has been at a record low of 1.75% a year since May 2015 when the central bank decided to cut it by 0.25 percentage points.
Early November, central bank governor Mugur Isarescu said the central bank may ease the key lending rate or minimum reserve requirement ratios further but the decision is influenced by domestic and external uncertainties. “We will likely remain cautious in terms of the key rate, even with negative inflation. We’re not ruling out further easing,” said Isarescu at that time, adding there is room for easing particularly on the reserve ratio front, to bring requirements closer to the levels in Europe.
Romania’s government on Wednesday approved the state budget plan for next year, which targets a budget deficit of 2.8% of gross domestic product and considers an economic growth projection of 4.1%. The budget plan also raises investment spending and sees 1.6% growth in revenue due to improved tax collections.