The National Bank of Romania (NBR; the central bank) raised its key policy interest rate by 25bp to 2.00% last week, the first hike in more than nine years. The move appears too late and too small to rein in overheating concerns. The latter have risen as real GDP growth surged to +8.8% y/y in Q3 while a tightening labor market and rapid nominal wage growth (+13% in 2017) have steadily pushed up headline inflation from -0.5% y/y at end-2016 to +3.3% y/y at end-2017, approaching the upper limit of the NBR’s +2.5% ± 1pp inflation target range. Meanwhile, as imports grow faster than exports, the current account deficit widened to –EUR5.6bn in the first 11 months of 2017, almost twice as much as in the same period in 2016. Likewise, the fiscal deficit nearly doubled y/y in January-November 2017. On a positive note, private sector credit growth has been kept in check, at +6.8% y/y in November 2017. We expect further policy rate hikes in the course of 2018.
