Monday, November 9, 2009

Romania cbank ups '09 CPI fcast, wait and see mode


BUCHAREST, Nov 6 (Reuters) - Romania's central bank upped its annual inflation forecast for December on Friday and said political uncertainty that has delayed vital aid cash had pushed it into wait-and-see mode on rates.

The International Monetary Fund stopped reviewing Romania's 20 billion euro aid package on Friday, holding back rescue funds originally slated for next month pending the resolution of a political crisis sparked by the government's fall last month.

The revised forecast -- due to higher excise taxes -- puts price growth at 4.5 percent in December, at the top end of the bank's 2.5-4.5 target band, central bank Governor Mugur Isarescu said on Friday. The bank kept its 2.6 percent forecast for 2010.

Some analysts say this year's target is at risk largely because of political noise and chances of leu weakening.

'The 4.5 percent forecast is likely closer to reality but all it shows is the central bank could overshoot the target,' said ING( ING - news - people ) Bank's Nicolaie Alexandru-Chidesciuc. 'Even without further leu weakening I don't think the target can be met.'

Earlier this month, the bank surprised markets by keeping its benchmark interest rate unchanged at 8 percent, leaving Romania with the highest borrowing costs in the European Union.

'The main reason (for keeping rates flat) was uncertainty. There is nothing we can do but wait and see,' Isarescu told a conference to present the quarterly inflation report.

'Our main message is that we remain tense.'

Isarescu said the government's massive needs to finance its budget deficit would cause the spread between the key rate and interbank rates to persist, exerting pressure on inflation.

He warned efforts to fund the fiscal deficit without IMF cash were an 'acute problem'.

Analysts have said the central bank's cautious stance was a signal it was worried about the leu currency which has been under pressure since sinking to its lowest level in eight months after the fall of the centrist minority cabinet.

Dealers have said the central bank has intervened repeatedly to support it in recent months. The bank has declined comment. On Friday, Isarescu said its foreign exchange reserve level was 'slightly excessive'.

He said further leu weakening was unjustified by economic fundamentals, adding the current account deficit had narrowed far beyond expectations.

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