Wednesday, December 1, 2010

Romania to Keep Rate Steady, Avoid Exaggerated Shift

Romania’s central bank will probably keep its main interest rates unchanged as it has so far seen no second-round effects on inflation from an increase in the value-added tax, Deputy Governor Cristian Popa said.

The central banker doesn’t expect any “exaggerated shifts” in monetary policy as that would probably trigger an increase in exchange rate volatility and have a limited positive impact on exports, Popa told reporters today.

“I guarantee you that if change the interest rate in an exaggerated manner, which we don’t intend to do, it will rather lead to high volatility of the exchange rate than boost exports,’’ Popa said. “ We have committed to react to any appearance of second-round effects from the VAT hike, which so far hasn’t happened. We think it’s a good idea to keep the key rate at current levels.’’

Romanian central bank left its monetary policy rate at a record-low 6.25 percent on Nov. 2 for the fourth meeting in a row. The government, which secured 20 billion euros ($26 billion) of loans from the International Monetary Fund, European Union and other lenders to stay afloat, raised the VAT by 5 points to 24 percent in July, boosting inflation to the fastest pace in more than two years.

Four Rate Cuts

Policy makers stopped cutting borrowing costs in June after lowering rates four times. The Balkan nation’s economy is mired in the worst recession on record. The economy contracted a preliminary 2.5 percent in the third quarter and is expected to shrink as much as 2 percent this year as government austerity measures damp demand. It will probably return to growth of 1.5 percent in 2011, according to the IMF.

“The temporary shock of inflation didn’t translate into an increase in the key rate because we are confident the monetary conditions as a whole are anchoring well the expectations,’’ Popa said.

The Romanian leu exchange rate moves have been “extremely moderate” recently, according to Popa, who declined to comment on whether the central bank had intervened to support the country’s managed floating leu.

The leu strengthened 0.1 percent to 4.2986 per euro as of 5:55 p.m. in Bucharest trading.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net 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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