Friday, October 31, 2008

Romanian cbank holds rates, eyes crisis impact

By Radu Marinas and Marius Zaharia
BUCHAREST, Oct 30 (Reuters) - The Romanian central bank held interest rates at 10.25 percent on Thursday as inflationary pressures remained high and policymakers waited for more impact of the global financial crisis on local markets.

Analysts polled by Reuters this week forecast no change in borrowing costs, arguing worries about the effect on inflation from loose fiscal policy necessitated tight monetary policy.
However, most said a new hike was not on the cards as markets had stabilised in recent sessions and the Romanian leu appeared fairly supported.

"Further decisions would depend on global financial conditions which could make the leu more vulnerable next year," said Lucy Bethell from Royal Bank of Scotland in London.
The central bank said in a statement macroeconomic risks related to the global financial crisis and the inflation outlook required a "firm" monetary stance, which analysts read as a sign that rates could remain on hold for a while.

"The central bank wants to send a signal their current rate is appropriate and that this level might be kept for a longer period in order to counter renewed inflationary pressures," said Ionut Dumitru, head of research at Raiffeisen Bank.

The rate decision follows a similar decision by Poland on Wednesday and a cut by Slovakia on Tuesday.

Romania's markets have fared somewhat better during the global financial meltdown than in the neighbouring Hungary, which had to lift borrowing costs by 3 percentage points last week to shore up investor sentiment and sought financial help from the International Monetary Fund.
After the rate decision the leu stepped back from a 6-day high against the euro set in early trade on the back of regional optimism.

Money market rates have also steadied this week and analysts said interbank borrowing costs may decline in coming weeks after Thursday's central bank decision to lower the reserve requirement on leu liabilities to 18 percent from 20 percent.

Analysts said market sentiment remained shaky, with investors unsure about Romania's policy response to economic threats and fretting over vast external imbalances that make the country more vulnerable to financial trouble than some of its neighbours.

Several analysts said Romania may still have to seek rescue packages from the IMF in the future if the market situation deteriorates.

Concerns about Romania's economic standing worsened this week, when Standard & Poor's cut its foreign currency credit rating one notch to "BB+", putting it back at junk status with a negative outlook and citing a lack of policy response to mounting economic risks.
In good news, Romanian inflation began to ease in recent months, coming off a three-year high of 9 percent set in July to 7.3 percent in September, as lower food and fuel costs offset price pressures stemming from domestic consumption.

Household spending is expected to slow down next year but fiscal pressures may remain high due to welfare spending pledges put into law this year and wage demands from the public sector.

But despite the central bank's steep monetary tightening this year, which totalled 325 basis points over 12 months, annual prices are still seen topping the bank's December target range of 2.8-4.8 percent and reaching some 6 percent. (Reporting by Marius Zaharia and Radu Marinas; Writing by Justyna Pawlak; Editing by Victoria Main)

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