Tuesday, January 6, 2009

Romania’s Central Bank May Lower Interest Rate, Survey Shows

By Adam Brown

Jan. 5 (Bloomberg) -- Romania’s central bank will lower its main interest rate for the first time since 2007 after inflation and economic growth slowed because of global financial turmoil, a survey of analysts showed.

The Banca Nationala a Romaniei will lower the Monetary Policy Rate to 10 percent from 10.25 percent, according to the median estimate in a Bloomberg survey of six economists. The central bank is expected to announce its decision after 11 a.m. tomorrow in Bucharest.

“The National Bank of Romania is the only central bank in eastern Europe that has not yet started cutting interest rates,” Bartosz Pawlowski, an economist at TD Securities Ltd. in London, said in an e-mail today. “Given that the probability of a hard landing in Romania is substantial, we think rates will be cut by half a percentage point.”

Inflation slowed to an annual 6.7 percent in November from 7.4 percent in October because of lower food and fuel costs. Analysts predict it will continue to slow in coming months. Economic growth, although the fastest in the European Union, eased to 9.1 percent in the third quarter and the central bank forecast it to be as slow as 3 percent this year.

Romania’s central bank has raised its main interest rate seven times in the past year to damp inflation. Hungary cut its main interest rate to 10 percent on Dec. 22 as an economic slowdown hit eastern Europe, leaving Romania with the EU’s highest rate. Central banks in the Czech Republic and Slovakia also cut interest rates last month.

Last Cut

The Romanian central bank last cut its main interest rate to 7 percent from 7.25 percent on June 25, 2007, its fourth straight cut at the time, as inflation hovered near post-communist lows at an annual rate of 3.8 percent.

Subsequent increases have helped slow private debt growth to an annual 38.3 percent in October from more than 63 percent in June. Central bank Governor Mugur Isarescu has said private debt growth, especially in foreign currencies, has been a main risk to inflation and raised the likelihood of higher unpaid debt rates.

The rate decision is the first since parliamentary elections on Nov. 30 ended with a government formed by an alliance between the Liberal Democrat Party and the Social Democrat Party under Liberal Democrat Prime Minister Emil Boc. Both parties said they want spending increases and tax cuts, which the central bank has said could widen the budget deficit and current-account gap.

In the central bank’s last rate decision on Oct. 30, policy makers lowered the reserve requirement on leu-denominated deposits to 18 percent from 20 percent while leaving the rate unchanged.

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

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