Tuesday, November 3, 2009

Romanian cbank defies mkt fcast, keeps rates flat

BUCHAREST, Nov 3 (Reuters) - Romania's central bank surprised markets by keeping interest rates unchanged at 8 percent on Tuesday, signalling it was cautious of risks stemming from a government crisis and a recent currency market dip. 

The majority of analysts polled by Reuters last month had predicted a half-point cut at the bank's last meeting this year, arguing falling inflation could offset some of the risks posed by the collapse in October of its centrist minority government.

The leu, under pressure from a halt in the global rally for stocks and emerging markets in recent weeks, rose briefly after the decision and analysts said it suggested rate hikes could even be on the cards if market volatility continued.

The leu fell to its lowest since February last month after the fall of the cabinet, while the Polish, Czech and Hungarian currencies have weakened around 2 to 5 percent.

But its losses have been muted at about a third of a percent, and dealers say they suspect the central bank is propping it up with covert interventions in the FX market.

"Despite a very weak economy the central bank might be forced to hike its key policy rate if the regional currency sell-off continues and/or the political uncertainties do not ease soon," said Lars Christensen of Danske Bank in Copenhagen.

"That said, we do not think the decision to keep the key policy rate unchanged will be enough to ease the pressure on the leu given the political uncertainties and the negative region environment at the moment."

Easing rates by 225 basis points so far this year and securing an aid package with the International Monetary Fund are the main tools Romania has used to soften the impact of the crisis, which has sent its economy and inflation diving.

Analysts say the collapse in October of the government and political deadlock over appointing a new cabinet ahead of a presidential election posed the risk that a third aid tranche from the 20 billion euro aid package would be delayed.

An IMF mission is currently in Bucharest to review Romania's progress in meeting conditions of its aid deal, seeking broad political support to keep the agreement going.

The bank also said it set an inflation target for 2011 at 3 percent plus/minus 1 percent against 3.5 percent for 2010 , a target that will need to be discussed with the government.
More information is expected from the bank later on Tuesday.

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