Romania’s ‘Done Deal’ on Rates No Longer Certain

(Bloomberg) -- Romania is on the cusp of lowering borrowing costs for the first time in three years, but concerns over the European Union’s highest inflation rate may mean investors will have to wait a little longer.

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With the key rate on hold at 7% for more than a year, ten economists in a Bloomberg survey see the central bank making a cut of a quarter of a percentage point on Monday, while six predict no change.

Governor Mugur Isarescu suggested in February that policy easing could start at the May meeting, but board member Cristian Popa said last month that the institution may need more time as inflation isn’t slowing as fast as expected and risks remain elevated.

“A rate cut to 6.75% seemed a done deal just a few weeks ago,” said Valentin Tataru, a Bucharest-based economist at ING Groep NV’s local unit. “Since then, reasons for cautiousness have gathered on both the external front – with the US Federal Reserve pushing cuts further away and increasingly hawkish regional central banks – and the domestic front, with fiscal slippage and strong consumption growth amid robust wage gains.”

Poland, Hungary and the Czech Republic started lowering borrowing costs last year, though the central bank governor in Warsaw has said rates will now stay unchanged until the end of 2024.

For the Black Sea nation, fiscal risks remain the major concern. Prime Minister Marcel Ciolacu’s government has been struggling to reduce a budget deficit that’s expected to reach 5% of economic output this year and may take years to bring it into line with EU guidelines. The country also faces four rounds of elections this year and growing demands for higher wages and pensions.

Romania’s inflation rate declined to 6.6% from a year earlier in March, but the central bank’s latest projection showed it will stay above the target range until at least 2025.

ING’s Tataru sees the central bank staying on hold on Monday with policymakers waiting for “a better moment to start cutting.”

--With assistance from Barbara Sladkowska and Joel Rinneby.

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