Tuesday, June 30, 2009

Romania May Cut Interest Rate to Ease Recession, Survey Shows

By Adam Brown

June 30 (Bloomberg) -- Romania’s central bank will probably lower its main interest rate today to counter the effects of a lending crunch that has cut jobs, shut factories and prompted consumers to postpone spending, a survey of economists showed.

The Banca Nationala a Romaniei will cut the monetary policy rate to 9 percent from 9.5 percent, according to seven of eight economists in a Bloomberg survey. One predicted a deeper cut. The bank will announce the decision after 11 a.m. in Bucharest.

“We expect a cut of half a percentage point, given the prospects for disinflation and a sharper economic contraction,” Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank Romania, said in an e-mail. “Yet the governor is likely to preserve a positive bias and for this reason we would not expect a sharp cut.”

Central banks throughout Eastern Europe have been cutting interest rates and seeking international aid to counter the effects of recessions that have slashed demand for exports and cut foreign investment from the region’s main trading partners in western Europe.

Romania’s economy contracted an annual 6.2 percent in the first quarter as tightening credit slowed private lending, eased wage growth and prompted manufacturers such as carmaker Dacia SA and ArcelorMittal Romania SA to cut output.

At the same time, the inflation rate fell to 6 percent on year in May from 6.5 percent in April and as high as 9 percent in July of last year. The central bank says inflation may slow to 4.5 percent by the end of 2009.

Economic Outlook

The government predicts the economy will shrink about 4 percent this year, after growing 7.1 percent last year, the fastest pace in the European Union. Central bank Governor Mugur Isarescu, though, predicts an international loan may avert an economic decline for the full year.

The government agreed last month to a 20 billion-euro ($28 billion) international loan led by the International Monetary Fund and the EU to help finance its budget and current account deficits. As a condition, the government froze state wages this year and raised some taxes. Hungary, Ukraine, Belarus, Latvia and Serbia have also sought bailouts to prevent defaults and aid banks.

To contact the reporter on this story: Adam Brown in Bucharest atabrown23@bloomberg.net

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