Romania's central bank slows tightening pace, lifts key rate to 5.50%

BUCHAREST, Aug 5 (Reuters) - Romania's central bank raised its benchmark interest rate by 75 basis points to 5.50% on Friday, below market expectations, as it expects inflation to level off in the third quarter and the economy to slow down.

After the eighth consecutive hike since October, Romania's benchmark rate remains the lowest among its central European peers, even as the bank has ramped up the pace of tightening in recent months seeking to narrow the borrowing cost gap.

In July, the bank delivered a one percentage point hike, its biggest in more than a decade, and Governor Mugur Isarescu said the tightening pace would slow once inflation starts falling.

"The latest data and analyses point to a quasi-standstill of economic activity both in the second and third quarters of 2022, under the impact of the war in Ukraine and the associated sanctions," the bank said on Friday.

"GDP developments in the second quarter imply a marked decline in its annual growth rate."

Analysts polled by Reuters, who had predicted a one percentage point hike on Friday, expect annual inflation to have peaked at 15.05% in June but to remain in double digits for most of next year.

They see inflation at 13.9% at the end of this year and 8.0% at end-2023, above the central bank's current forecasts of 12.5% and 6.7%, respectively.

The bank, which will release new forecasts on Tuesday, said it expected inflation to level off and "gradually decline later on, yet on a path revised moderately upwards."

Policymakers have relied on firm market liquidity controls to push market rates sharply above the benchmark, effectively making monetary conditions tighter.

On Friday, the bank raised its lending facility rate to 6.50% from 5.75% and its deposit rate to 4.50% from 3.75%.

"We think that the magnitude of the hike matters less at this meeting and it's more about a continued commitment to tighten further," Deutsche Bank said in a research note.

The central bank has two more rate meetings scheduled this year. The Romanian leu was flat against the euro, unmoved from levels before the policy decision.

Elsewhere in the region, the Czech National Bank (CNB) held interest rates unchanged on Thursday, the first in the region to potentially end a tightening cycle. (Reporting by Luiza Ilie Editing by Mark Potter)