By Enes Morina
Romania's central bank cut its key interest rate Friday, joining a growing number of its European peers in lowering borrowing costs, a sign that policymakers believe that inflation will continue to abate across the continent.
The National Bank of Romania cut its key interest rate to 6.75% from 7%, responding to a decline in the annual rate of inflation, which fell to 5.1% in May from 5.9% in April as it continued to decelerate for a fourth straight month.
Headline inflation has slowed mostly due to falling energy prices, particularly natural gas, which decreased by 7% from the previous month in May following a larger decline of 11% in April. Romania had been grappling with high energy prices, as gas prices surged by 165% between the second half of 2021 and the same period in 2022, following Russia's invasion of Ukraine which triggered an energy crisis.
Food prices have also contributed to easing inflation, with food inflation slowing to just 1.2% in May compared to a peak of over 22% in early 2023.
"The annual rate of inflation will continue to decline in the coming months on a significantly lower trajectory than that highlighted in the medium-term forecast of May 2024," the central bank said in a statement.
However, other prices continue to rise at a faster pace than the central bank's inflation target of between 1.5% and 3.5%. Services inflation remained high at 9.3% in May, only easing slightly by 0.4% on the previous month. A tight labor market is also fuelling strong wage growth, with wage inflation still in the double digits.
As a result, ING Bank expects headline inflation to remain above the upper range of the inflation target at around 4% throughout the central bank's two-year forecast period.
The central bank last lowered borrowing costs in early 2021 and began to tighten policy later on that same year.
The Romanian move to cut rates comes nearly a month after the European Central Bank lowered its benchmark rate for the first time since 2019. Other neighboring central banks have also followed suit. In June, Hungary's central bank cut its key interest rate to 7% from 7.25% while its Czech counterpart cut rates by half a percentage point to 4.75%.
The central banks of Switzerland and Sweden have also lowered borrowing costs over recent months, while investors expect the Bank of England to cut its key rate next month.
By contrast, the Federal Reserve has held its benchmark rate steady so far in 2024, with Fed officials penciling in just one rate cut for this year.
Write to Enes Morina Hernandez at enes.morina@wsj.com
(END) Dow Jones Newswires
07-05-24 0833ET
