NBR hikes interest rates, further tightening to follow

The National Bank of Romania (NBR) raised its policy rate by 25bp to 1.50% at today’s meeting, and the backdrop of rising inflation, large twin deficits and currency weakness means that further rate hikes are likely to be delivered over the next 12 months. We expect the policy rate to reach 2.75% by mid-2022.
Liam Peach Emerging Markets Economist
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Emerging Europe Economics Weekly

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While a lot is still unknown about the Omicron variant, we don’t think it will prevent central banks from delivering further large interest rate hikes - Poland will be a case in point next week, where we expect a 75bp rate hike. The key exception is Turkey, where the departure of Finance Minister Elvan this week adds to signs that policymakers are not prepared to respond to the recent falls in the lira with an orthodox approach. The currency will remain under pressure and this week’s interventions in the FX market suggest policymakers’ tolerance of a weak lira is being tested. These interventions cannot be sustained and soft capital control may be the next port of call.

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Government draft budgets approved for 2022 this week in Czechia and Poland and further details of social support in Hungary suggest that fiscal policy will remain supportive of growth in Central Europe. But with spare capacity increasingly limited, this will continue to fuel strong inflation pressures. Meanwhile, European gas prices surged to new highs this week and Russia will be one of the main beneficiaries - gas exports could be as much as $75bn higher in the second half of the year than would otherwise have been the case. This will also support the budget position and may prompt the government to further relax its grip on the public finances.

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Emerging Europe Data Response

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The manufacturing PMIs for September provide additional signs that supply constraints continued to weigh on output in Central Europe, although it seems that price pressures eased further.

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