Thursday, September 27, 2007

Romanian Central Bank Leaves Key Interest Rate at 7%

By Adam Brown

Sept. 26 (Bloomberg) -- Romania's central bank left its key interest rate unchanged, after cutting it four times, as a drought and a weaker leu threaten to stoke inflation.

The National Bank of Romania decided to leave its Monetary Policy Rate at 7 percent at a board meeting in Bucharest today, it said in an e-mail. The decision was expected by all 10 economists in a Bloomberg survey.

``The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices and the evolution of the leu exchange rate, given the difficulty of assessing the duration and effects of the recent world financial market turbulences,'' the central bank said.

A drought that damaged two-thirds of Romania's crops this year pushed up food prices and a weakening of the leu this month made imports more expensive. The government also plans to increase spending, driving an eight-month budget surplus into a full-year deficit of 2 percent of gross domestic product.

Romania's annual inflation rate rose to 5 percent in August from 4 percent, reaching the upper limit of the central bank's year-end annual inflation target of 4 percent, plus or minus a percentage point.

`Under Threat'

``The 4 percent year-end inflation target is under threat,'' Beat Siegenthaler, a senior economist at TD Securities in London, said in an e-mailed note. ``We continue to believe that the National Bank of Romania will wait until the first quarter of 2008 to hike rates but the risk is for tightening to occur before year's end.''

Simon Quijano-Evans, a strategist at UniCredit Markets & Investment Banking, said in an e-mail that the central bank is ``clearly now waiting for the next inflation release before taking the next step.'' He predicted the central bank will raise its rate to 7.75 percent by February of next year.

The central bank board today also decided to leave its minimum reserve requirements on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei.

The Bucharest-based bank cut its key rate, the annual amount the central bank offers to commercial banks for one-month deposits, at its first four board meetings of this year. The rate was 8.75 percent when Romania joined the European Union in January, the highest in all of the 27 member states.

Prior Cuts

The reductions came as a stronger leu and lower-than- expected government spending helped slow inflation close to a 17-year low of 3.8 percent by June.

The leu was among the world's five best-performing currencies for much of the previous two years, helping slow inflation amid an inflow of investment as Romania prepared to join the EU this year.

A weaker leu in August raised prices of goods and services indexed to the dollar or the euro, including rents, telephone bills and gasoline. The leu has continued to decline in September, bringing its loss against the euro since Aug. 1 to 6.6 percent and its drop against the dollar to 3.5 percent.

The International Monetary Fund warned last week that Romania's widening current-account gap makes the economy and the currency more vulnerable to external issues such as international investors' reluctance to place money in emerging markets amid the U.S. subprime crisis.

The current-account deficit widened to a record 9 billion euros ($12.6 billion) in the first seven months of this year from 4.9 billion euros in the same period last year as imports rose because of the stronger leu and the scrapping of many trade barriers when Romania joined the EU.

To contact the reporter on this story: Adam Brown in Bucharest at

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