On Wednesday, the BNR decided to increase the key interest rate by 75 basis points, to 6.25%, trying to keep price growth under control and fix inflationary expectations of the population and companies.

“The Board of Directors of the National Bank of Romania, having met at today’s meeting, October 5, 2022, decided the following:

• raising the monetary policy interest rate to 6.25 percent per annum from 5.50 percent per annum, starting from October 6, 2022;

• an increase in the interest rate on a credit line (pawn shop) to 7.25 percent per annum from 6.50 percent per annum and an increase in the interest rate on a deposit to 5.25 percent from 4.50 percent per annum as of October 6, 2022;

• maintenance of tight control over liquidity on the money market,” the BNR said in a statement sent out on Wednesday.

This level of the key interest rate has not been reached since May 2010.

Theoretically, the higher the aggressiveness of the monetary policy decisions taken by the Central Bank, with the help of which you strengthen the monetary policy, the higher the effectiveness of the fight against inflation. But Iserescu should look in ten directions before making money more expensive. If the interest rate rises too much, so do the rates of those borrowing in lei, who may no longer be able to repay the loans and thus become insolvent, contaminating the banking system, which will wake up to dramatic defaults and systemic problems.

If it is not increased enough, it will be like treating a sharp bite with aspirin – the effect will be almost zero. In addition, you also need to look at what the surrounding countries are doing: if they have higher interest rates than yours, investors may take their money from you to invest in them (they give better returns)

10 key messages from the press release of the BNR:

• The annual inflation rate reached 15.32% in August, slightly above the forecast level. The increase was almost entirely due to the continued rise in food prices, but was largely offset by lower fuel prices (due to fuel cost offsets and lower oil prices) as well as base effects related to energy price developments.

• In the second quarter, economic activity slowed down significantly, compared with the previous interval to 2.1 percent from 5.1 percent in the first quarter, but much more modestly than expected. The development also makes it likely that there will be a moderate increase in excess aggregate demand over this interval, contrary to expectations.

• QOn an annualized basis, GDP growth slowed only marginally to 5.3 percent in the second quarter from 6.4 percent in the first quarter, thus continuing to significantly beat forecasts. However, the largest contribution to economic growth was made by stock fluctuations (7.3 percentage points), while the contribution of private consumption – secondary in size – significantly decreased compared to the previous quarter (to 4.7 percentage points), and the contribution of gross fixed capital formation remained very modest, although somewhat increased

• At the same time, the evolution of net exports again became sharply contractionary, i.ein the conditions of a decrease in the annual dynamics of exports, simultaneously with a significant increase in the import of goods and services.

• The latest high-frequency indicator data indicate a sharp slowdown in economic growth in the third quarter compared to the previous interval, under the influence of the escalation of the war in Ukraine and the expansion of related sanctions. The evolution, however, predicts a significant increase in the annual dynamics of GDP in this interval due to the base effect, but under the conditions of a slowdown in the growth of private consumption.

• Industrial production and volumes of new orders in the manufacturing industry reinforced their reduction in annual terms, but the volume of construction works significantly accelerated its annual growth.

• Exports of goods and services slightly reduced the annual variationin July, while imports slightly increased, including against the background of unfavorable external price conditions

• In September, the lion fully corrected its significant revaluation against the euro, accumulated in July-August, constantly fueled by internal events of a seasonal nature. In relation to the US dollar, the national currency depreciated as a result of events on international financial markets.

• The absorption of European funds, mainly those related to the EU’s Next Generation programme, is essential to achieve the necessary structural reforms, including the energy transition, and to offset, at least partially, the contractionary impact of supply-side shocks exacerbated by the war in Ukraine .

• Major uncertainties and risks are also related to the conduct of fiscal policy, given the requirement to continue fiscal consolidation in the context of the excessive deficit procedure and the general tendency to tighten financing conditions, but in difficult domestic and global economic and social conditions, which led to the introduction of several sets of support measures population and companies, which could have negative consequences for budgetary parameters.