Thursday, October 22, 2009

Romania to Hold Benchmark Rate This Year, UniCredit’s Pal Says

By Zoltan Simon

Oct. 21 (Bloomberg) -- Romania’s central bank will probably keep its key rate at the European Union’s highest this year to protect the leu after the government collapsed, said Rozalia Pal, the chief economist of the local UniCredit SpA unit.

The Banca Nationala a Romaniei will hold the monetary policy rate at 8 percent, a 19-month low, Pal said in an interview in Dubrovnik, Croatia, today. The budget gap may overshoot the government’s target this year, threateningInternational Monetary Fund payouts in December, she added.

Prime Minister Emil Boc’s Cabinet collapsed this month ahead of presidential elections in November. The nation has to implement spending cuts to meet terms of a 20 billion-euro ($30 billion) international bailout. The government forecasts an economic decline of 8.5 percent this year after growth of 7.1 percent last year, which was the fastest pace in the EU.

“The leu is under great depreciation pressure in this period in part because of the political risk,” Pal said. The political uncertainty means there is a “great risk” that Romania will overshoot its target for a budget shortfall of 7.3 percent of gross domestic product, she added.

The leu traded at 4.2925 per euro at 2:01 p.m. in Bucharest from 4.2945 late yesterday. The benchmark BET stock index fell 0.8 percent to 4632.82.

The central bank will probably work to keep the leu near 4.3 per euro this year as a depreciating currency may boost inflation and threaten financial stability in a country reliant on foreign-currency loans, Pal said. She said the leu may strengthen to 4.2 by the end of 2010.

Inflation

The annual inflation rate, which has been dropping since February, fell to 4.9 percent in September from 5 percent the previous month, missing the 4.8 percent median estimate of economists in a Bloomberg survey. Prices rose 0.4 percent on the month, increasing for the first time since June.

The central bank has lowered the benchmark rate five times this year, from 10.25 percent to the current 8 percent. There is a chance that policy makers may still decide to cut by a quarter-point this year, Pal said.

Romania froze state wages and pledged to cut spending to meet terms of the bailout from the IMF and the EU. The government collapsed after the Social Democrats quit the coalition to protest the dismissal of a minister.

President Traian Basescu appointed a prime minister who is trying to win opposition support for confirmation. Basescu himself is up for re-election on Nov. 22.

To contact the reporter on this story: Zoltan Simon in Budapest atzsimon@bloomberg.net.

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