Thursday, May 31, 2007

Romania rate cuts premature, increase needed-IMF

WASHINGTON, May 31 (Reuters) - The International Monetary Fund said on Thursday Romania's interest rate cuts of 150 basis points this year were "premature", and urged the authorities to reverse the trend and raise rates.

"Given the need to firmly anchor inflationary expectations and the credibility of the inflation targeting framework, (IMF) directors considered the recent interest rate cuts to be premature," the IMF said in its 2007 economic review of the Romanian economy.

"They urged the authorities to increase interest rates as needed to attain the inflation targets," the IMF added.

The rate increase may pressure the Romanian currency to rise, the IMF said, but added the exchange rate was competitive and a stronger currency will help contain inflation.

"(IMF) directors also considered it important to avoid any deviation between the policy and effective interest rates, and to reduce reserve requirements cautiously," the fund said.

Romania's central bank has cut its benchmark rate by 150 basis points this year, with the last quarter point cut on May 2, after price growth slowed more than expected.

Romania's central bank deputy governor Eugen Dijmarescu told Reuters on Thursday the current level of interest rates served the country's current economic needs and the central bank would meet its inflation goal this year.

The IMF said Romania's growing current account gap and the possibility that inflationary pressures could be reignited were clouding the economic outlook.

"The economic outlook is clouded by a widening current account imbalance and the risk of a resurgence of inflationary pressures, as a result of strong domestic demand that is being fueled by rapid credit growth and procyclical fiscal and incomes policies," the IMF said.

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