Tuesday, May 4, 2010

Romania rate easing to slow in May on Greek worries

By Marius Zaharia

BUCHAREST, May 3 (Reuters) - Romania's central bank is seen slowing its rate easing cycle, cutting burrowing costs by 25 basis points to keep hold of some ammunition in case spillover from Greece's debt crisis intensifies. 

Ten out of 15 analysts polled by Reuters on Monday see interest rates cut by 25 basis points to a new record low of 6.25 percent. Four expect a half-a-percent cut, while one sees them flat.

Here are some possible outcomes of the Romanian central bank's board meeting, as well as the expected market reaction.


Rates have come down 375 basis since the start of last year as the central bank tried to ease the pain of a 7.1 percent economic contraction in 2009. All moves over the past 12 months were of a half-a-percent size.

Dealers say another tool that the central bank used to fight recession was to intervene covertly in currency markets this year to stem appreciation pressures in the leu and give a helping hand to exporters.

But with markets scared by Greece's debt crisis, there is now pressure on the leu to weaken and a majority of analysts say the bank may want to signal it is cautious and cut rates by less than 50 basis points.

Analysts' forecasts were unmoved by a 110 billion euro Greek rescue deal agreed on Sunday, because doubts remain over Greece's ability to implement the austerity measures attached to the package..

"Uncertainty persists irrespective of the package," said ING Bank's chief economist Nicolaie Alexandru Chidesciuc. 

* Probability: High
* Market reaction: The leu is expected to gain slightly as some players remain bullish on rates.


Some analysts say the bank has enough ammunition to counter a sell-off in the leu by intervening in the FX market.

And with data suggesting the struggling economy was still in recession in the first quarter, they see little reason for a slowdown in rate cuts, especially since inflation remains on a downward path.

* Probability: Medium
* Market reaction: The leu could lose some ground in the short term.

If that move were exacerbated by external factors, dealers expect the bank to sell euros and prevent weakening. The central bank has repeatedly said it favours low leu volatility.

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