Wednesday, January 7, 2009

Romania c.bank holds fire, leu concerns remain

BUCHAREST, Jan 6 (Reuters) - Romania's central bank as expected kept interest rates at 10.25 percent at its first meeting of 2009 on Tuesday and held off with a possible change in the minimum reserve requirement for its leu currency.

Fourteen of 16 analysts polled by Reuters had predicted the bank would hold fire on rates at the meeting due to concerns over a weaker leu currency, though some had speculated it could ease monetary policy through a cut in the reserve requirement to smooth liquidity conditions and unlock a tight money market.

Most analysts also said the bank would join its central European peers in easing borrowing costs next month by anything from 25-75 basis points to defend economic growth.

"It is possible to see a cut in February, because by then they will have complete information on the fourth-quarter economic data, which I expect to be significantly deteriorated compared to previous ones," said Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank in Bucharest.
The bank pledged to pursue an "adequate management of liquidity" in the banking system through "the active use of open-market operations."

Romania's ex-communist peers cut rates late last year as recession fears moved east, but Romania has held off to boost investor confidence in the face of a huge current account gap that has made it more vulnerable to the global credit crunch.

The leu has fallen 13 percent against the euro since late October. It traded a shade softer at 4.0623/73 against the euro after the decision, against Monday's close of 4.053.

Inflationary pressures have also been bolstered by social spending ahead of November's parliamentary election, placing the central bank in front of a policy dilemma as signs of a sharp economic slowdown show up in the real economy.

With European demand slowing and global cash shortages likely to curb investment, most economists predict a sharp slowdown in Romania's growth in 2009 to around 4 percent from this year's roughly 9 percent expansion.

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