Wednesday, January 6, 2010

Romania risks surprise rate cut to boost growth

By Radu Marinas and Luiza Ilie

BUCHAREST, Jan 5 (Reuters) - Romania's central bank surprised markets on Tuesday by cutting interest rates to aid its recession-hit economy, although the move raised some worry of pressure on the leu currency after a political crisis. 

An adviser to the bank's governor said the main concern behind the 50 basis point cut, bringing key rates to 7.5 percent, was to help lending as the economy bids to recover from recession and last year's funding crisis.

"The reality required a rate cut at this time. This is a signal for the banks ... to cheapen credit to individuals and companies," said adviser Adrian Vasilescu.

The bank said in a statement it was hopeful it would consolidate its gains in the fight with inflation in 2010 once the flow of funds from a 20 billion euro IMF-led international aid deal resumed.

"In this context, in order to ensure the convergence of inflation rate to the announced medium-term targets, alongside a solid relaunch of the economic growth, the board has decided to lower the monetary policy rate," it said.

Some analysts said Tuesday's cut could put some downward pressure on the leu currency which, coupled with likely hikes in energy and utilities prices and a potential blip in world oil prices, could hamper efforts to fight inflation.

But others said the move could lead to another cut next month. A majority of economists had expected the cost of borrowing to stay flat until the passage of a 2010 austerity budget seen as key to unlocking the international aid.

"It's hard to say what's going to happen next," said Ionut Dumitru of Raiffeisen in Bucharest. "If January inflation isn't too bad and we meet IMF requirements to get the money ... then a new cut is possible."

The leu softened slightly after the decision but bounced back to hit a three-month high to the euro later and trade at 4.18 per euro by 1405 GMT, up from 4.2080 after the decision.


Tuesday's cut added to 225 basis points worth of easing by the bank last year before a political crisis created a policy deadlock and prompted the IMF to put its rescue package on hold.

The bank also lowered the rate on its deposit facility to 3.5 percent from 4 percent, and the Lombard (lending) rate to 11.5 percent from 12 percent.

Romania rode a credit boom to become one of the European Union's fastest growing economies in 2008. It is expected to have contracted by 7 percent last year, however, and recover to growth of 1.3 percent in 2010. Inflation rose to 4.7 percent in November but is seen falling back within the bank's 2.5-4.5 percent target range as the impact of excise tax hikes fades.

Vasilescu's comments were another sign of growing concern that the bank's easing is not trickling through to more lending in the real economy.

Central bank data showed non-government leu loans fell 6.5 percent on the year in November, after a 29 percent rise a year earlier. Foreign currency loans slowed their growth to 10.3 percent on the year, versus 47 percent in 2008.

The new government has approved an austere 2010 budget and pledged to enact painful reforms, key to unlocking 3.3 billion euros worth of combined IMF and EU funds as early as next month.

But the rate cut could add to risks left behind by the political crisis, which culminated in a disputed presidential election last month and the subsequent creation of a government that still has only a shaky parliamentary majority.

"We believe this decision could prove counter-productive and, even though we acknowledge that economic crisis in Romania is still very deep, there is not room for monetary easing in the present political and financial environment," said Lars Christensen of Danske Bank in Copenhagen.

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