May 7, 2018 / 10:49 AM / 2 months ago

UPDATE 2-Romania raises interest rates after inflation surge

(Adds governor, analyst comment)

BUCHAREST, May 7 (Reuters) - Romania’s central bank raised its benchmark interest rate by 25 basis points to 2.50 percent on Monday to tackle sharply rising prices, as its governor said borrowing costs would stay below inflation.

Higher energy prices and consumption-friendly wage hikes drove annual inflation in the import-reliant European Union state to a five-year high of 5 percent in March, significantly above the central bank’s 1.5-3.5 percent target.

Monday’s policy decision was unanimous, and the bank has now raised rates three times this year, by 75 basis points in all.

Central bank governor Mugur Isarescu said borrowing costs would however be kept in check.

“Because real interest rates in Europe are still negative, for us too the interest rate is below the inflation rate,” he told reporters.

“Those who judge that rates will rise to reach inflation are wrong, we will also maintain a gap. In Europe the gap is of about two percentage points, I don’t know whether it will be the same in Romania, but the gap will be maintained.”

The head of the ruling Social Democrat Party and lower house speaker, Liviu Dragnea, criticised policymakers in a letter released on Friday for hiking rates and for suggesting fiscal policies were driving the inflation surge.

The government has cut taxes and raised public sector wages and pensions, encouraging consumption in one of the EU’s fastest-growing economies. But rising budget and current account gaps have weighed on assets, including the leu currency.

“The government and parliament are expressing the popular vote,” Isarescu said. “Because of labour force migration, wages are bound to rise. On the other hand, the central bank expresses what the economy can handle. Do you think it’s easy to reconcile the two? It’s a process.”

He said inflation was expected to slow to the “vicinity” of the top of the target range by year-end.

New inflation forecasts, to be released on Wednesday, were roughly in line with current estimates, he added.

Asked whether the bank preferred rate tightening or market liquidity draining operations to fight inflation, Isarescu said the bank was “battling with all its instruments.”

The bank also raised its deposit and lending facility rates by the same amount to 1.50 percent and 3.50 percent, respectively.

Before the hike, the bank drained 3 billion lei ($768.52 million) of liquidity from markets via one-week deposits , at a fixed rate of 2.25 percent.

“We currently see one more hike in the policy rate in the remainder of 2018,” BCR said in a research note.

“But this is highly dependent on future inflation prints and capital flows towards emerging markets for avoiding a high interest rate differential and unwanted appreciation of the leu.”

The Romanian currency was flat against the euro at 1455 GMT. ($1 = 3.9036 lei) (Reporting by Luiza Ilie; editing by John Stonestreet)

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