Tuesday, November 3, 2009

Romania Holds Key Rate at 8% After Cabinet Collapses

By Irina Savu

Nov. 3 (Bloomberg) -- Romania’s central bank left its benchmark interest rate unchanged at the lowest level in 19 months to keep inflation under control and protect the currency after the government collapsed in October.

The Banca Nationala a Romaniei kept the monetary policy rate at 8 percent, the European Union’s highest, at its last meeting of this year, the Bucharest-based bank said in an e-mail today. The decision was expected by nine of 12 economists in a Bloomberg survey. Two predicted a quarter-point cut and one a half-point reduction.

Policy makers “decided to remain cautious due to political instability and jittery markets and risk appetite,” Pasquale Diana, a London-based economist at Morgan Stanley, said in an e- mail today. “Macro considerations, such as growth and inflation, do point to lower rates.”

The east European country’s government collapsed last month after Prime Minister Emil Boc lost a no-confidence vote, threatening implementation of austerity measures linked to Romania’s bailout led by the International Monetary Fund.

The leu traded at 4.3023 per euro at 4:44 p.m. in Bucharest, little changed from yesterday’s closing price.

Exchange-Rate Control

A declining currency may boost inflation and threaten financial stability in a country reliant on foreign-currency loans. In October, the leu slid to 4.3501 against the euro, the weakest level since Jan. 13. Investors have speculated the central bank has been supporting the currency, which traded in a stable range of 4.1 to 4.3 per euro.

“The bank remains focused on exchange-rate control and not on helping the recovery to start,” Nicolaie Alexandru- Chidesciuc, chief economist at ING Bank Romania SA in Bucharest, said in an e-mail today.

The central bank set a 2011 inflation target at 3 percent, plus or minus 1 percentage point, compared with a 2010 year-end goal of 3.5 percent.

“The inflation target of just 3 percent seems too ambitious given inflation developments in recent years and the NBR’s poor record with achieving inflation targets along” Chidesciuc said. “It may affect the central bank credibility. I do not see, besides a stronger leu, other factors with positive impact on inflation.”

Inflationary Pressures

Inflation slowed less than analysts estimated in September to a two-year low of 4.9 percent from 5 percent in August and 9 percent a year earlier, limiting the central bank’s scope to cut rates. The bank forecasts the inflation rate will fall to 4.3 percent by the end of this year and 2.6 percent in 2010.

Inflationary pressures are building, driven by a planned increase in excise duties from Jan 1., a weaker leu and government policies potentially boosting prices, the central bank said today.

“Inflationary pressures, due to an anticipated upward adjustment of excise duties as well as the unfavorable impact on expectations coming from heightened risks related to fiscal and income policies, given the volatile political climate, are to be expected,” the bank said.

The central bank left the minimum-reserve requirement at 30 percent on foreign-currency commercial deposits and 15 percent on deposits in lei. The bank has cut the foreign-currency rate from 40 percent and 18 percent on lei deposits so far this year.

Persistent Contraction

Romania’s economy contracted an annual 8.7 percent in the second quarter, the most on record, as consumption dropped and the global crisis forced the government to seek an international bailout. The bank has lowered the rate five times since February to soften the impact of the recession.

The government and IMF forecast a slump of 8.5 percent this year after growth of 7.1 percent in 2008.

Inflation is slowing “with a certain lag” and the economic contraction is “persistent,” the bank said in its statement. There is “a worsening of foreign investors’ perception regarding the Romanian economy amid heightened tensions in the domestic political field.”

Romania secured a 20 billion-euro ($29.3 billion) international loan led by the IMF and the EU this year to finance its budget and current-account gaps.

As a condition for receiving the credit, the government froze state wages this year and pledged to cut spending to meet a budget deficit target of 7.3 percent of gross domestic product in 2009. Hungary, Ukraine, Belarus, Latvia and Serbia also received bailouts to prevent defaults and aid banks.

To contact the reporter on this story: Irina Savu in Bucharest isavu@bloomberg.net.

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