Friday, January 7, 2011

Romanian Central Bank Keeps Benchmark Rate Unchanged at Record-Low 6.25%

Romania’s central bank kept its main interest rate unchanged for a fifth meeting as policy makers maintain a “prudent” stance to bring inflation back to its medium-term target.

The Banca Nationala a Romaniei kept the monetary policy rate at a record-low 6.25 percent, the Bucharest-based bank said in an e-mailed statement today. It halted the easing cycle in June after cutting rates four times to combat a recession. Today’s decision was in line with the forecasts of seven economists surveyed by Bloomberg.

Romania, which took 20 billion euros ($26.3 billion) of loans from the International Monetary Fund and the European Union to stay afloat, raised the value-added tax by 5 percentage points to 24 percent in July, boosting inflation to the fastest pace in more than two years.

“In a bid to firmly anchor inflation expectations, the board decided to leave unchanged the monetary policy rate and to continue to pursue an adequate management of liquidity in the banking system,” the statement said. “The maintenance of a prudent monetary policy stance is needed in order to preserve the prospects of a return of the annual inflation rate toward medium-term targets.’

More Cuts

Inflation will be “close” to 8 percent at the end of 2010 from 7.7 percent in November and below the bank’s on Nov. 4 forecast of 8.2 percent. The rate will probably end this year at 3.4 percent as the effects of the VAT increase dissipate, according to the November outlook.

“We could see more rate cuts later in the year when the central bank is confident that second-round effects from the VAT hike in July 2010 will be limited,” Anders Svendsen, chief economist at Nordea Bank in Copenhagen, said in an e-mail to investors after the rate announcement. “Inflation is likely to fall back into the target range from 2.5 percent to 4.5 percent when the effect of the VAT hike fades in the second half and the tough budget for this year could pull inflation down toward the lower end of the range.”

The bank left its minimum-reserve requirement at 25 percent on foreign-exchange deposits and 15 percent on lei deposits. The leu kept gains versus the euro after the decision, trading 0.1 percent stronger at 4.2668 as of 5:30 p.m. in Bucharest.

The government, which survived four no-confidence votes in parliament last year over unpopular wage cuts and the tax increase, should stick to the terms of its international bailout and continue the “essential” implementation of fiscal consolidation and structural reforms.

The administration plans to narrow the budget deficit to 4.4 percent of gross domestic product from a preliminary gap of 6.6 percent in 2010 to qualify for bailout payments.

To contact the reporters 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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