Friday, October 31, 2008

Romania's Central Bank Leaves Interest Rates on Hold

By Adam Brown

Oct. 30 (Bloomberg) -- Romania's central bank left its main interest rate unchanged and lowered the minimum reserve requirement for leu-denominated deposits to support the currency and mute the effects of the global financial crisis.

The Banca Nationala a Romaniei left the Monetary Policy Rate at 10.25 percent, the second-highest in the European Union, it said in an e-mail today. Eight of 10 analysts in a Bloomberg survey predicted no change, while two predicted an increase. It lowered the requirement on leu deposits to 18 percent from 20 percent. The foreign-currency requirement is unchanged at 40 percent.

The leu has come under pressure during the global crisis, threatening to boost inflation, particularly in the euro-linked services industries. The government also lowered its forecast for 2009 economic growth this week to 6 percent from 6.5 percent amid the credit crunch. It predicts economic growth of 9.1 percent on year in the fourth quarter.

``The analysis of the latest macroeconomic developments indicates a continuation of the disinflation process and the maintenance of high economic growth throughout 2008,'' the central bank said in an e-mailed statement today. ``At the same time, the deepening of the financial crisis on global markets has triggered uncertainties surrounding the world economic outlook and its implications for the Romanian economy.''

Liquidity Boost

The lower reserve requirement, to take effect on Nov. 24, ``will increase the amount of lei on the market, lowering short term money-market rates,'' Bartosz Pawlowski, a currency strategist at TD Securities in London, said in an e-mail today. ``This in turn could result in the weakening pressure on the leu, which has been recently supported by high local rates.''

The leu extended losses after today's decision, trading at 3.6397 against the euro at 2:39 p.m. in Bucharest, compared with 3.6336 just before the decision and 3.6178 yesterday. The BET benchmark stock index rose 2 percent.

The central bank left its main interest rate on hold at its last policy meeting in September after raising it seven consecutive times, from 7 percent a year ago, as rising oil and food prices lifted the inflation rate from a 17-year low of 3.7 percent in March 2007 to this year's peak of 9 percent in July.

Inflation Target

The inflation rate fell to 7.3 percent in September from 8 percent in August as a bumper farm crop restrained food-price growth and international oil prices fell. Central bank Governor Mugur Isarescu predicted in August that the rate will end the year at 6.6 percent and raised his end-year 2009 inflation forecast to 4.2 percent from 3.5 percent. He said Romania has to slow inflation to 3 percent by 2010 or risk missing its target of adopting the euro in 2014.

Global financial turmoil has weakened Romania's leu by about 9 percent against the euro and 22 percent against the dollar in the past year as investors pull out of countries seen as carrying a higher risk. Telephone bills, gasoline, rent and many other goods and services in Romania are gauged in euros and charged in lei, meaning a weaker leu has an immediate impact on inflation.

The central bank warned that increased government spending also threatens inflation goals for next year. President Traian Basescu last week approved a 50 percent wage increase for teachers and said he would also favor an increase for state health-care workers.

``Macroeconomic risks associated to the disinflation process, especially those related to income policy and to increased budget spending, remain on the upside in the context of heightened uncertainties related to the impact of the global crisis on financial markets,'' the central bank said.

Budget Fears

Finance Minister Varujan Vosganian has said raises for state employees could widen the 2009 budget deficit beyond the target of 2 percent of gross domestic product and boost inflation.

Standard & Poor's decided on Oct. 27 to downgrade Romania's foreign-currency debt rating to junk, citing increased government spending ahead of Nov. 30 parliamentary elections and the current- account deficit. S&P also gave the rating a ``negative'' outlook.

Other central banks in eastern Europe have raised, lowered or left rates on hold in recent weeks as the global financial crisis manifests itself to varying degrees in emerging markets.

Poland's central bank left its benchmark interest rate unchanged at 6 percent yesterday, saying it expected the global crisis would slow Polish economic growth in the ``next quarters.'' The Slovak central bank cut its main rate on Oct. 28 by half a percentage point, matching the European Central Bank, to 3.75 percent

Hungary, which secured a 12.5 billion euro loan from the International Monetary Fund on Oct. 28 to help cope with the effects of the global crisis, raised its key rate to 11.5 percent from 8.5 percent on Oct. 22 to shore up its currency, the forint.

To contact the reporter on this story: Adam Brown in Bucharest at abrown23@bloomberg.net

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