Wednesday, September 29, 2010

Romanian Central Bank Holds Benchmark Interest Rate Unchanged at 6.25%

Romania’s central bank left its main interest rate unchanged for a third straight meeting today as inflation triggered by a value-added tax increase prevented policy makers from acting to combat the lingering recession.

The Banca Nationala a Romaniei in Bucharest kept the monetary policy rate at a record-low 6.25 percent, matching the expectations of all nine economists surveyed by Bloomberg.

The government, which secured a 20 billion euros ($27 billion) of loans from the International Monetary Fund and European Union to stay afloat, raised the value-added tax by 5 points to 24 percent in July to cut the budget deficit and meet bailout conditions. The tax increase pushed inflation to 7.6 percent in August, the fastest in two years.

“It’s hard to expect any change in the interest rate,” Miroslav Plojhar, an economist at JPMorgan Chase & Co. in London, said before the rate announcement. “The economy is still weak, calling for lower rates, but it is unlikely to happen with inflation in the 7 to 8 percent range. I do not foresee any change until the third quarter of next year.”

The east European country’s economy, mired in the worst recession on record, will probably contract as much as 1.9 percent in 2010, as austerity measures damp consumer demand, the IMF and government forecast. The economy will return to growth in 2011, led by industry and exports, the IMF’s Romania mission chief, Jeffrey Franks, said Aug. 4.

Leu Steady

The leu was little changed following the interest rate decision and traded 0.1 percent lower on the day at 4.2727 per euro as of 12:33 p.m. in Bucharest. It has appreciated 3 percent from a record low of 4.4012 reached in June.

The cost of protection against the non-payment on Romania’s bonds for five years in the credit default swaps market dropped to 360.215 basis points yesterday, the lowest in more than three months, according to data compiled by Bloomberg.

Romania’s contraction may be worse than forecast this year as government spending cuts curb domestic demand, Central Bank adviser Lucian Croitoru said Sept. 23. Romania may miss its IMF- agreed budget deficit targets of 6.8 percent of gross domestic product for 2010 and 4.4 percent in 2011 because of the lingering recession, Croitoru said.

Central bank Governor Mugur Isarescu said July 8 he sees no reason to adjust the benchmark rate as a result of the tax increase, because the expected acceleration in inflation “isn’t monetary.” Policy makers halted rate reductions on June 30 after cutting rates four times in a row to combat recession.

The central bank forecasts inflation will end the year at 7.8 percent, above its target of 3.5 percent plus or minus 1 percentage point, before slowing to 3.1 percent in 2011 as the effect of the VAT increase dissipates, Isarescu said Aug. 6.

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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