BUCHAREST, Feb 6 (Reuters) - Romania's monetary policy will remain tight until fiscal and wage restrictiveness is enforced, central bank Governor Mugur Isarescu said on Friday.
Even though it was the fastest-growing economy in the European Union early in 2008, Romania is now seen as one of the bloc's most risky economies is and the only one rated below investment grade by some agencies.
Economists say the vulnerability comes from its high dependence on foreign cash to fuel growth, and excessive domestic borrowing and spending, which have been exacerbated by loose fiscal policy in recent years.
"Monetary policy continues to be overloaded. It is clear we cannot relax it until fiscal and income constraints start functioning," Isarescu told a news conference to present the quarterly inflation report.
The bank cut interest rates by a modest quarter point to 10 percent on Wednesday, the first easing in 19 months running.
The decision, which followed a series of much deeper cuts throughout eastern Europe as recession fears mount, came despite concerns that a weak leu currency could revive inflation, underscoring the extent of economic risks faced by Romania.
"The risks of a too fast (monetary) relaxation is increasing leu volatility and deepening the depreciation of the currency," Deputy Governor Cristian Popa told reporters. "Do not expect spectacular changes of interest rates."
The bank has kept its inflation forecast of 4.5 percent for 2009 and its 2.5-4.5 target. It sees end-2010 figure at 3.2 percent, while its "working hypothesis" for a goal is 3.5.
Meanwhile, Romania's government sent an austere 2009 budget bill to parliament on Friday, pledging to slash the deficit to 2 percent of GDP from over 5 last year, keep wage growth in check and allot a hefty 7 percent of GDP to much-needed investment.
Isarescu, who said the central bank "totally supports" the budget plan, said the emerging economy has the chance of a soft landing, predicting economic growth in 2009.
"The deficit (target) is extremely hard to achieve, but it can be done," he said. "Moving resources from consumption towards investment will stimulate economic growth. It is the catalyst that can make the economy move (and) key to restore confidence."
The International Monetary Fund said on Wednesday Romania may slide into recession because persistent imbalances and slow reforms have left it ill-prepared for the global downturn.
However, the central bank sees more chances for growth.
"Baseline scenario is 2 percent growth," Popa said. "We do not rule out recession, but it is less probable than positive growth."
Growth would be partly helped by robust investment earmarked in the budget, the size of EU funds that could be absorbed but also because Romania's exports account for a small part of GDP.
The bank also said the current account deficit, whose correction it is closely monitoring, may fall to below 10 percent of GDP this year, from around 12 percent last year.
"We do not have an alternative to the adjustment of the current account deficit and the entire programme of policies must have this adjustment at its centre," said Isarescu. (Editing by Stephen Nisbet)