February 5 (SeeNews) - Romania's central bank is likely to increase its key rate by 0.25% for a second time this year, to 2.25%, at its monetary policy meeting on February 7, as inflation is expected to pick up, Austria's Erste Group said on Monday.
"Another option to tighten monetary policy would be for the central bank to implement its firm liquidity management pledge by absorbing the currently looming excess liquidity, for instance by organizing deposit taking auctions at the prevailing monetary policy rate," Erste said in an e-mailed short note on Romania.
However, Erste analysts think that the Romania's central bank, BNR, will be cautious with such a move, as it risks introducing further volatility in the money market, given that currently money market rates are trading close to the deposit facility rate, whereas deposit auctions may send them much closer to the policy rate, which is 1 pp. higher.
A second reason for being cautious with liquidity tools is the possible effect on the exchange rate, it added.
"Against an appreciating currency background, loose liquidity conditions may be favoured in order to avoid reinforcing a strengthening trend that may prove damaging for Romania’s external balance and may later reverse abruptly."
Erste also takes into account the scenario in which a second rate hike would take place in the second quarter, but thinks that another early hike would please the more hawkish side of investors, by keeping the options open for later further moves.
In the analysts' view, this may "become an important card in BNR's hands as we enter a period when headline inflation will exceed the upper bound of the target band, while annual CORE inflation will continue its uptrend, surpassing the central target."
"On the other hand, an early hike could in theory curtail the need for a more ample hiking cycle, thus offering a potential “discount” for the more medium term monetary conditions," analysts said.
In January, Erste expects inflation to pick up to 2.7%. Romania's annual consumer price inflation accelerated to 3.3% in December, from 3.2% in November, according to the latest data available from the country's statistical office.
In its latest inflation report issued in November, BNR increased its end-2017 inflation forecast to 2.7% and kept the 2018 inflation forecast unchanged at 3.2%.
For 2018, Erste sees a total of 100 bps worth of hikes but stressed that the amplitude and the timing of the hiking cycle is very likely to be data dependent, with inflation and especially CORE inflation being top of the list among the indicators to watch, while the exchange rate coming a close second.
On January 8, BNR increased its monetary policy rate to 2.0% from record low 1.75%, the first rate hike in a decade. The central bank raised the deposit facility rate to 1.0% per annum from 0.75% per annum and the lending facility rate to 3.0% per annum from 2.75% per annum.
(1 euro=4.6526 lei)