Thursday, February 3, 2011

Romania holds rates, cuts possible later in 2011

By Marius Zaharia

BUCHAREST, Feb 3 (Reuters) - Romania's central bank kept interest rates at 6.25 percent as expected on Thursday, holding fire with more support for a struggling economy after a jump in inflation caused by a rise in value added tax.

It will issue a full statement at about 1400 GMT and has previously indicated it may cut rates later in 2011 after Romania seals a new International Monetary Fund deal and the effects of the 5 percentage point VAT rise start to fade.

Central banks in Hungary and Poland have started to tighten monetary policy, but Romania is holding fire as its economy is struggling to recover and lagging peers. The Czech Republic is expected to hold rates later on Thursday.

"I keep my estimate of 5.75 percent end-year rates, but there is little space for manoeuvre given inflationary risks in Europe and in the CEE region," said Georgiana Constantinescu, analyst at Credit Europe.

The European Union's second poorest member depends on a 20 billion euro IMF-led bailout to keep its finances and domestic financial markets on track and its economy is struggling to gain traction after contracting by more than 7 percent in 2009.

Yearly inflation rose sharply to hit 8 percent in December due to rises in food prices and the impact of July's increase in VAT. The bank earlier cut rates by a total of 400 basis points in an easing cycle stretching back to August 2008.

That, coupled with the leu currency's 5-percent fall against the euro since the first quarter of 2010, has limited the central bank's options and analysts now only expect it to resume cuts once inflation enters a clear downward trend.

The leu was unmoved by the central bank decision and was trading at 4.26 per euro, down 0.1 percent on the day, by 1137 GMT.

Inflation is expected to ease in the second half of 2011 as the impact of higher VAT washes out and most analysts expect the central bank to resume rate cuts after that.

But some said inflationary risks and other countries raising borrowing costs may push Romania's central bank -- which will release its quarterly inflation report on Monday -- to stay on hold for the rest of the year.

"Inflationary risks are very high and that makes a cut very unlikely," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.

"We've got wage hikes this year in the public sector and may come in the private sector as well, we need to adjust administered (government regulated) prices which are way below market prices and 2012 will be an electoral year."

All 19 analysts polled by Reuters had expected rates to remain unchanged. Before Thursday's decision, most had seen cuts ranging from 25 to 75 basis points by the end of the year. (Additional reporting by Ioana Patran, Radu Marinas and Sam Cage; editing by Patrick Graham, Ron Askew)

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