Tuesday, May 4, 2010

Romania Cuts Benchmark Interest-Rate for Fourth Time This Year

By Irina Savu

May 4 (Bloomberg) -- Romania’s central bank cut its benchmark interest rate for the fourth time this year to a record low as the economy struggles to recover from its worst recession in at least 20 years.

The Banca Nationala a Romaniei cut the monetary policy rate to 6.25 percent from 6.5 percent today, the bank said in an e- mailed statement. The decision was expected by five of the six economists surveyed by Bloomberg. One had expected a half-point cut to 6 percent.

The European Union’s second-poorest member is relying on a $26.3 billion International Monetary Fund and EU loan to resurrect its economy, which is mired in the country’s worst recession since it abandoned communism. Efforts to comply with the terms of the loan have boosted investor confidence and strengthened the currency. The leu has gained 4.7 percent against the euro since an Oct. 28 low, helping stem inflation.

The cut comes amid “progress made on the IMF program, the large negative output gap and the marked decline in external financing pressures,” Citigroup Inc. economists Ilker Domac and Engin Dalgic said in a note to clients today before the announcement. ‘The combination of a feeble recovery and relatively benign inflation outlook suggests that there is room for further, albeit limited, rate cuts.”

The inflation rate fell to 4.2 percent in March, the lowest in almost three years, as a stronger currency lowered prices of imports, rents and other items gauged in euros. Still, the leu has strengthened less than the Polish zloty and the Czech koruna.

Romania may be more at risk to a spillover from Greece’s fiscal crisis, BNP Paribas SA emerging-market strategist Shahin Vallee said in an April 29 note.

The leu has strengthened about 2.3 percent against the euro this year, while the Bucharest Stock Exchange benchmark BET index has gained about 20 percent in the same period.

IMF Flows

Policy makers in Bucharest, who last cut the main rate by half a percentage point in March, lagged behind the U.S. Federal Reserve, the European Central Bank, and the Czech and Polish central banks in easing into the crisis after the currency lost 20 percent against the euro from peak to trough at the end of 2008.

The IMF in March resumed its Romanian bailout program, which had been frozen since November, after parliament formed a government and passed the 2010 budget.

An IMF team is in Bucharest this week to review the country’s loan agreement and will announce its conclusions on May 7. A successful review would allow Romania to draw an 850 million-euro ($1.1 billion) tranche.

The government, which must narrow its budget deficit to 5.9 percent of gross domestic product this year under the terms of the loan, said its budget shortfall in the first quarter met the IMF quarterly target of 8.25 billion lei. The country’s gap was 8.22 billion lei, or 1.53 percent of GDP, at the end of March.

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