Thursday, January 13, 2011

Romanian Central Bank Unlikely to Change Rates on Inflation, Isarescu Says

Romania’s central bank is unlikely to change interest rates as it battles to slow inflation, which accelerated to the fastest pace in more than two years after a tax increase boosted prices, Governor Mugur Isarescu said.

The Banca Nationala a Romaniei’s main goal in 2011 will be to damp inflation prompted by a 5 percentage point increase in the value-added tax in July, Isarescu said yesterday in an interview in Bucharest. The inflation rate rose to 8 percent in December, more than double the 3.4 percent forecast for end- 2011.

The first-round effects of the VAT increase have been “reasonable,” allowing the central bank to keep its main interest rate unchanged for a fifth meeting on Jan. 5 at a record-low 6.25 percent, Isarescu said.

Keeping the rate steady “has eased second-round effects from the VAT increase,” he said. “If one raises the interest rate, that will generate expectations and create second-round effects. So this is where our resistance” to changing interest rates comes from. “It’s very important to stand fast like at Stalingrad. Monetary policy

Romania, which took a $26 billion bailout from international lenders in 2009 after a recession eroded budget revenue and put pressure on the currency, raised the value-added tax to 24 percent in July to meet a budget-deficit target of 6.8 percent of economic output in 2010 and 4.4 percent this year.

Slumping Economy

The Balkan nation’s economic contraction extended to a seventh quarter with the second-biggest slump in the EU after Greece in the third quarter as the VAT increase and wage cuts sapped demand. Gross domestic product shrank 2.5 percent in the three months ending in September from a year earlier.

The economy will “certainly” post growth of 1.5 percent this year, led by exports and industrial-output gains. The economy probably contracted 2 percent in 2010, after shrinking 7.1 percent in 2009, according to forecast from the IMF and the government.

The global financial crisis put pressure on the leu, which weakened 2.88 percent against the euro in the last 12 months to make it the worst-performing emerging-market currency of the 176 ranked by Bloomberg. The leu traded at 4.2538 to the euro at 6:28 p.m. in Bucharest.

The central bank doesn’t officially target a specific currency rate and has been operating on the foreign-exchange market to prevent “excessive liquidity” from causing “ample leu moves” as the Finance Ministry changed foreign-currency loans into leu, Isarescu said.

“We support a managed float but we’ve never defined the margins,” Isarescu said. “Some people said that I mentioned a leu trading range of 4.1 to 4.3 per euro, so I personally replied that if the range for the leu is between 4.1 and 4.3, then I like it.”

The next central bank policy meeting will take place on Feb. 3.

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

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net
will generally stay on target.”

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