February 7, 2018 / 12:08 PM / a year ago

UPDATE 2-Romania's central bank hikes key rate to 2.25 pct

(Adds cenbank comments)

BUCHAREST, Feb 7 (Reuters) - Romania’s central bank delivered a quarter point hike in its benchmark interest rate to 2.25 percent as expected on Wednesday, seeking to curb rising inflation, with price growth forecast to slow in the second half.

Governor Mugur Isarescu said the bank had to react in the face of rising prices but he was not expecting a long battle, with inflation expected to return within target by the end of the year.

The bank began increasing borrowing costs for the first time in a decade last month and analysts, who had predicted Wednesday’s rise, estimate the benchmark will stand between 2.5 and 3.5 percent at the end of 2018.

Inflation rose to 3.3 percent on the year in December, sharply above the central bank’s 2.7 percent forecast, fuelled by a jump in domestic consumption.

The bank has said it expects inflation to exceed its 1.5 to 3.5 percent target range in the first part of this year, as the statistical base effect of a 2017 value-added tax cut fades, before falling back in target at the end of the year.

“We are battling inflation,” Isarescu told reporters. He added he expected leu currency loan rates to rise only marginally as a result of Wednesday’s hike.

“We do not expect a long battle ... the hope is we will manage to return it within the target by year-end.”

New inflation forecasts will be released on Feb. 9.

Isarescu also said policymakers could not rush to move interest rates without looking at the decisions made by neighbouring central and eastern European states such as Hungary and Poland, as well as the European Central Bank.

Romania is the second among central European peers to start tightening from record low levels, after Czechs.

On Wednesday, the Polish central bank kept its main interest rate steady at a record low 1.50 percent. Most analysts expect the next Polish rate hike in early 2019.

“I expect the central bank will buy as much time as possible this year,” said Ciprian Dascalu, chief economist at ING Romania. He expects two more hikes this year as well as measures to adjust market liquidity, with further tightening due in 2019.

The Romanian leu was trading at 4.6515 per euro at 1420 GMT, 0.1 percent softer on the day.

Wednesday’s move would also boost the central bank’s deposit and lending facility rates to 1.25 percent and 3.25 percent, from 1.00 and 3.00 percent respectively. (Reporting by Luiza Ilie; Editing by Toby Chopra)

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