Tuesday, November 3, 2009

Romanian rates stay flat, cbank cautious on policy

By Radu Marinas and Luiza Ilie

BUCHAREST, Nov 3 (Reuters) - Romania's central bank unexpectedly kept its main interest rate unchanged at 8 percent on Tuesday, citing risks stemming from a government crisis that have threatened its IMF deal.

The country's leu currency has been under pressure since sinking to its lowest since February after the fall of the centrist minority cabinet last month, and dealers say the central bank has intervened to support it.

The bank said on Tuesday it would stay prudent because it expected the political turmoil to fuel inflationary pressure -- another signal it was worried about the leu -- and also noted jumps in excise duties and a persistent spread between its key rate and interbank rates.

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

The decision leaves the country of 22 million with the highest interest rates in the European Union. Analysts have warned that could stifle lending and likely delay economic recovery.

'Through today's decision monetary policy restrictiveness has risen,' said Nicolaie Alexandru-Chidesciuc of ING ( ING - news - people ) Bank.

'The focus now should be on economic contraction ... in which Romania is a lot deeper than in other countries with a flexible exchange rate in the region.'

The bank said Romania's meeting the conditions of its 20 billion euro ($29 billion) IMF/EU aid deal was 'essential for achieving disinflation objectives, restoring investors' confidence ... as well as creating conditions for a lasting economic recovery.'

Easing rates by 225 basis points so far this year and securing and the rescue package have been the main tools Romania has used to soften the impact of the crisis, which has sent its economy and inflation diving.

But uncertainty in politics reigns. On Wednesday, Romania's parliament is widely expected to reject a proposed government led by prime minister designate Lucian Croitoru.

That will most likely cause political deadlock to drag on until after an expected second round of presidential elections on Dec. 6, which analysts say pose a risk that a badly-needed 1.5 billion IMF loan tranche could be delayed.


The leu's fall has been underpinned by a halt in the rally for emerging markets and stocks in the last month that has also pushed the Polish, Czech and Hungarian currencies down around 2 to 5 percent.

But its losses have been muted at about a third of a percent. Dealers say they suspect the central bank is propping it up with covert interventions in the FX market and analysts were doubtful the rate verdict would ease that pressure.

'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,' said Danske Bank's Lars Christensen.

Some hope of leniency from the IMF emerged on Monday, when a representative said the Fund could be flexible on commitments to enact budget and state payroll reforms but the country must pass an agreed budget by Dec. 10 to get its next tranche quickly.

But EU Economic Affairs Commissioner Joaquin Almunia was more reserved, saying Bucharest risked delays in aid because it was hard to tell whether it was meeting the deal's terms.

'We will look into those lists of commitments ... Without the conclusions of these assessments, we cannot explain clearly if we will disburse or not, and when,' Almunia told a news conference in Brussels.

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.

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