Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
The National Bank of Romania recent interest rate hike of one percent puts Romania in the Top 10 countries with the highest interest rates in Europe. We are on the 9-10th spot at parity with Iceland at 4.75%, above us is Poland with 6.5%, Czech Republic with 7% and Hungary with 7.75%. This is also the top 5 of European Union countries with the highest rates. The highest interest rate in Europe belongs to Ukraine 25%, followed by Moldova – 18.5%, Turkey – 14%, Belarus 12% and Russia 9.5%.
Poland increased the interest rate last week with only 0.5%, less than the 0.75% expected by the market, though it still has a rising inflation, which in June amounted to 15.6%. The real interest rate – which is calculated by subtracting the inflation rate from the interest rate – is at -9.1% smaller than the Romanian one which is -9.74%. If we leave aside Ukraine, Hungary has the lowest real interest rate in Europe with only -2.95%. Despite this and a very aggressive move of its Central Bank which raised 1 week deposit rates by 2% to 9.75%, very close to its 10.7% inflation rate, the forint continued its devaluation against the US dollar that reached almost 25% from the beginning of the year and against the Euro that reached almost 12%.
The Fed published its minutes that signal more hikes in an attempt to prevent the inflation from becoming “entrenched”. Policy makers increased interest rates by 75 basis points last month and backed hiking them at their next meeting in July by either 50 or 75 basis points, according to the minutes. This is showing that the Fed members recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis. The latest moves of the European Central Banks are showing the same philosophy. The investors are looking toward the ECB to see if it will follow suit.
The US dollar continued its strengthening against the EURO and other european currencies, including the RON and there are reports seeing it going to parity. This stance of the Fed that is ready to trade economic growth versus curbing inflation is seen by the markets less dangerous than the risk that Russia will cut the natural gas deliveries that Europe is facing. Kit Juckes, Chief Global Currency Strategist believes that despite the European energy dependence of Russia is falling, it is not fast enough to avoid recession if the pipeline is closing. In case that will happen, we might see another 10% depreciation of the EURO versus the dollar that will bring the currencies to parity for the first time since 2002.
While a cheap Euro is good for exports, depriving Europe of natural gas will hinder the industry into producing more goods. We are already seeing in Germany the start of troubles that high gas prices are bringing. But amid all these uncertainties we are starting to see the first good signs pointing toward an easing of inflation. The pressure on the supply chains continued decreasing in June but is still at historical high levels.
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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