NBR will not use interest rates to ease inflation

NBR Governor Mugur Isarescu said yesterday he would not use interest rates to ease inflation, suggesting that the only lever available to the central bank remains the exchange rate. When inflation increases, central banks usually raise interest rates in order to slow down consumer price increases.
Isarescu explained that inflation generated by the VAT raise has the role of correcting last year’s excessive salary and pension increases, coming as a substitute for the cuts overturned by the Constitutional Court, so the NBR (National Bank of Romania) does not intend to intervene. As a result, the key rate on RON-denominated loans could stay at the current 6.25% a year over the next few months, a scenario also anticipated by most analysts. “VAT raise-induced inflation is not monetary, it has a corrective role. Non-monetary inflation does not call for an NBR response. If we intervened, the correction would no longer occur,” Isarescu said.
Asked how high banks’ interest rates on RON deposits should be considering inflation is estimated to be 8% at the end of the year, the governor said, “Interests are overly generous in fact.”
Bankers have come with promotional interest rates of over 8% a year on RON-denominated deposits as the central bank expects inflation to peak at 8% at the end of the year and then return to a downward trend.