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Interest rates continue to grow amid fears of stagflation, consumers feeling the pain

The latest good labor data in the United States is adding to the narrative of a new aggressive rate increase by the Fed in September. The European Central Bank started to raise interest rates too but the countries in Central and Eastern Europe are ahead of the pack having the top four largest interest rates in the European Union.


In Romania, at the end of last week, the National Bank increased the interest rate with another 0.75% to 5.5% mentioning in its decision that the latest data and analysis point to a quasi-stagnation of economic activity in both the second and third quarters of this year under the impact of the war in Ukraine and associated sanctions.


The recent decision concerning the interest rate is keeping Romania on the fourth place in the EU behind Hungary with an interest rate of 10.75%, Czech Republic with 7% and Poland with 6.5%. The aggressive rate hike in Hungary is placing it at less than 1% of the inflation rate in an attempt to stop the forint depreciation and make Hungary more appealing for the foreign capital. Poland is next with a differential to inflation of 9% followed by Romania with 9.55% and Czech Republic with 10.2%.


However, the consumers are feeling the pain of these rate increases, 3 months ROBOR exceeding 8% and making the consumer pay more on the monthly installments. This high level of interest rate was last seen in February 2010.


The Romanian economy is starting to show a decrease in consumption signaling a possible stagnation of inflation too. The latest data from the National Statistics Institute is showing that in June the retail sales showed the first decrease month on month for 2022 with 2.1%. This decrease is showing in food and non food products the only category showing an increase compared with May 2022 being the fuels. Still the retail sales are showing a 3.2% increase compared with June last year, mentioned by NBR in its report too. But according to NBR the industrial production resumed its annual contraction, the volume of new orders in manufacturing fell compared with the same period last year, and the volume of new construction work almost stopped growing in annual terms.


Despite the prospects of slowing down of the economy the labor market in Romania remained strong, NBR mentioning that the number of employees in the economy continued to grow at a strong pace in April-May, almost exclusively on the back of private sector hiring, and the unemployment rate extended its decline to 5.3% in June, while remaining slightly above pre-pandemic levels. The labor shortage has, however, halted its almost two-year-long uninterrupted rise and three-month hiring intentions have eased slightly, amid mixed developments at the sectoral level, probably justified by the effects and uncertainties stemming from the war in Ukraine and the sanctions in place.


In the United States, after two consecutive quarters of GDP contraction and analysts debating whether it is recession or not, the latest labor data came with a surprise. In July, 528,000 new jobs were created, larger than the average monthly gain over the prior 4 months of 388,000 and twice more than the analysts expectations. The strong labor data was also strengthening the dollar, pushed higher bond yields and is strengthening the Fed views on tightening. The market is now taking into consideration a continuation of the Fed’s aggressive rate hikes of another 0.75% in September. But the inflation data that will be published this week might show us if this is the case or not.

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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