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August 11, 2022

NBR sees inflation into double digits, increases interest rates

Market commentary by eToro analyst for Romania, Bogdan Maioreanu

 Each meeting of the National Bank of Romania (NBR) Board starting October last year brought an interest increase. The latest one raised the interest with 0.5% to 2.5%, reaching the pre pandemic levels. Inflation remains a big concern, the National Bank of Romania estimating that we will witness a steep increase in the second quarter of 2022 to two digits. The main reason is the readjustments of energy prices after the compensation of prices will expire in April this year. According to the NBR, we will see a steep decrease in inflation at the beginning of next year but still above previous estimates with inflation reaching the NBR target in the fourth quarter of 2023.

Another reason for the rate hike was to stimulate savings by increasing interest rates.  However if we compare savings rates that are from 0.8% to 4.5% per year with the inflation rate of 8.19% having prospects to grow to double digits, we see that savings are losing an important percentage in purchasing power. Another effect of rate increase will be seen in loans that will become more expensive, leading to increased installments for the population and higher cost of money for companies.

Currently, Romania has the lowest interest rate in our region, the champion being Czech Republic with 4.5%, followed by Hungary 2.9% and Poland with 2.75%.

The European Central Bank acknowledged mounting inflation risks and it is preparing the markets for the possibility of a rate hike. Klaas Knot, the Dutch Central Bank President and a member of the European Central Bank’s governing council, said that he expects the ECB to raise interest rates in the fourth quarter of this year. Currently the ECB policy rate is still at 0%.

Across the Atlantic markets are already trying to price in interest hikes and analysts are only trying to estimate the number of these. While BofA sees seven quarter of percent rate hikes this year, followed by four more in 2023, others are seeing four or five increases this year.

The only large economy that cuts interest rates 3.8% to 3.7% is China, to defend a weakening economy with low, 1.5% inflation. Decreasing consumer spending, tighter regulations, a struggling property sector as well as a zero-tolerance Covid policy, raised concerns about sustainability of its economic growth. Last year China was one of the stock markets that dramatically underperformed.

The markets are expecting anti inflationary measures like the interest rate hikes but are also looking at the prospects for economic growth hoping that hikes will not stop growth. The latest IMF World Economic Outlook is forecasting a slowdown in 2022 considering that the global economy enters 2022 in a weaker position than previously expected. Global growth is forecasted at 4.4%, lower than the previously estimated 4.9% in October 2021, but higher than the average in the 3 years before the pandemic. United States output is seen at 4% from 5.6% last year and China at 4.8% from 8.1% in 2021.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.


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