Wednesday, March 3, 2010

Romania to Cut Main Interest Rate ‘Prudently,’ Croitoru Says

By Adam Brown and Irina Savu

March 3 (Bloomberg) -- Romania’s central bank, which has cut its main interest rate by one percentage point to 7 percent this year, will reduce the European Union’s highest benchmark “prudently,” a central bank adviser said.

“The rate reduction trend will continue but not in big steps,” Lucian Croitoru, a monetary policy adviser at the Banca Nationala a Romaniei told The Money Channel today. “I think it will disappoint those who are pressuring the central bank to cut in big steps. It will happen prudently.”

Romania’s central bank held off cutting its main interest rate in the last three months of 2009 while other regional banks cut theirs as the government collapsed and the International Monetary Fund froze payments from a bailout loan, leading to the lei weakening against the euro.

The 7 percent rate compares with 1 percent in the euro area and the Czech Republic and 3.5 percent in Poland. Neighboring Hungary, where currency weakness held up rate cuts for five months in 2009, last month cut its benchmark to a record low 5.75 percent.

Policy makers in Bucharest cut the main rate half a percentage point last month, following a half-point cut in January. The IMF resumed the bailout in February, easing pressure on the currency. The central bank will next meet to discuss interest rates on March 29.

The leu traded at 4.1056 per euro at 12:23 p.m. in Bucharest, from 4.1049 yesterday. The currency has gained 3.4 percent in the past six months.

The 20 billion-euro ($27 million) loan, which includes contributions from the European Union and other lenders, was frozen last November. It was renewed in February after the country formed a new government and passed a 2010 budget.

Analysts including Neil Shearing at London-based Capital Economics and Nicolaie Alexandru Chidesciuc at ING Bank Romania predict the main interest rate will fall to 6 percent as the central bank seeks to stimulate economic growth.

Romania’s gross domestic product shrank an annual 6.5 percent in the fourth quarter of last year, more than forecast by economists, as construction and industry shrank.

Croitoru predicted the economy will exit recession in the second half of this year when “domestic demand, which has the largest weight in GDP, picks up.”

--Editors: Balazs Penz, Chris Kirkham.

To contact the reporter on this story: Adam Brown in Bucharest at abrown23@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@Bloomberg.net

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