RO: NBR holds key rate at 6.50%, as expected

In line with broad consensus the NBR decided to keep interest rates unchanged at the May meeting. The key rate remains at 6.50%. We continue to expect three key rate cuts of 25bp this year which would bring the key rate at 5.75% by year-end. Fiscal and political developments remain the main sourced of uncertainty. We see risks for fewer rate cuts if market and macro conditions require it.

In the press release following the rate decision the central bank mentions a significantly higher inflation path than previously estimated. The current NBR forecast has annual CPI at 3.8% by year-end. The upward revision was expected and is in line with the higher than anticipated CPI evolution in the first four months. Based on the latest assessment the NBR expects inflation to enter only marginally below the upper bound of the variation band of the target in the first quarter of 2026. The new NBR forecast will be published on Tuesday along with the quarterly Inflation Report. Our expectations are that headline CPI will end 2025 at 4.0% y/y. This is in a no fiscal policy change that would significantly impact the CPI scenario.

The NBR also draws attention to the negative effects of the recent political turmoil on the local financial market: The protracted electoral period and the rising political tensions reversed capital flows on the local financial market. Lately, capital outflows have increased significantly, in various forms. These shifts have had a major impact on liquidity and on money market rates, as well as on the demand-and-supply ratio in the forex market, Romanias foreign exchange reserves and the leus exchange rate.

Based on our LLM assessment, the tone of the NBR remains slightly hawkish and mostly negative. Persistent inflation, financial stability and fiscal uncertainties are the main concerns of the central bank. With high uncertainty being a key topic.

Weak growth numbers and monetary policy stance of the ECB and peer countries could be arguments for the doves in the coming meetings. There are currently around 100bp of rate cuts expected in Poland over the next twelve months which might put some pressure on the NBR as well. Fiscal concerns, increased FX vulnerability due to elevated risk premia and sovereign rating risks, as well as high and mostly upside inflation forecast uncertainties could ultimately outweigh them in the favor of a more hawkish stance.