Thursday, May 21, 2009

Deep Romania rate cuts would do harm-cbank's Lazea

BUCHAREST, May 20 (Reuters) - Dramatic interest rate cuts would harm Romania's inflationary outlook and raise the risk of stagflation, the central bank's chief economist Valentin Lazea said on Wednesday. 
Like most of its neighbours, the European Union state fell into recession this year, as the global financial crisis trampled consumption and manufacturing.

However, concerns over inflationary pressures and currency stability have made the central bank cautious about cutting its benchmark interest rate, relatively to other banks in the region that began easing cycles months earlier.
It cut rates by 50 basis points to 9.5 percent earlier in May after a 20-billion euros IMF-led loan to Romania helped improve investor sentiment and stabilise the currency.

"Dramatic relaxation of the policy interest rate would do more harm in terms of inflation than good in terms of economic growth. The result could be stagflation, the worst possible outcome," Lazea said in a speech.
"We hear every now and then businessmen, politicians, even heads of banks asking why we don't cut rates by 2-3 percentage points, since inflation is in the bag," Lazea said. "I beg to disagree with this."

Lazea's comments cemented expectations the bank would remain cautious regarding any further easing, after Governor Mugur Isarescu had said the May rate cut should not be seen as aggressive and warned room for more cuts was "not very big".

"This strengthens the belief that we will not see massive rate cuts this year," said Nicolaie Alexandru-Chidesciuc, ING Bank senior economist.

"The central bank cannot afford to ease rates below 8.75 percent ... because risks to inflation are high."
Romania's annual inflation slowed to 6.5 percent in April from March's 6.7 percent, in line with expectations but was the highest in the EU and considerably above the central bank's 2.5-4.5 percent target for this year.

Meanwhile, the economy shrunk by 6.4 percent on the year in the first quarter, after recording two consecutive quarters of contraction.

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