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Romania c-bank likely to hike key rate in 2018 - Erste

Romania c-bank likely to hike key rate in 2018 - Erste Romania's c-bank

BUCHAREST (Romania), October 11 (SeeNews) - Romania's central bank will have to increase its key rate next year, as inflation is expected to pick up, Austria's Erste Group said on Wednesday.

A pickup in inflation to a level above the upper end of the target band looks very likely in the second quarter of 2018, Erste Group analysts said in a short note on Romania.

Romania's annual inflation rate rose to 1.8% in September, from 1.2% in August, surprising Erste on the upside. In its latest inflation report issued in August, Romania's central bank, BNR, increased its annual inflation forecasts for this year and next, to 1.9% and 3.2%, respectively, from 1.6% and 3.1% projected earlier.

Even if the spur in inflation would only last for a brief period of a couple of months, it would probably put pressure on the central bank to act earlier in the year. Thus, Erste sees two policy rate hikes at the beginning of 2018, on top of the likely narrowing of the interest rate corridor in November.

"External market conditions will determine whether this will prove enough to contain pressure on RON assets, but we think that the central bank will be prudent before delivering too much tightening and will aim to coordinate by means of fiscal policy developments," Erste said.

In these conditions, a tightening of the fiscal stance would be desirable, as it would reduce the need for rate hikes that may prove costly in terms of widening of the current account deficit spurred by potential strength of the leu currency, Erste concluded.

On October 3, BNR maintained its monetary policy rate at record low 1.75%. BNR's board also decided to narrow the corridor of interest rates on its standing facilities around the policy rate to ±1.25 percentage points from ±1.50 percentage points.

The central bank last changed its key rate in May 2015, when it cut it by 25 basis points.

In Romania, Erste Group owns Banca Comerciala Romana (BCR), the country's top bank by assets.

(1 euro = 4.5984 lei)

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