Thursday, March 31, 2011

Romanian Central Bank May Leave Benchmark Rate at Record Low

Romania’s central bank will probably leave its benchmark interest rate unchanged at a record low for a seventh meeting as Europe’s highest borrowing costs boost the leu and helps tame inflation.

The Banca Nationala a Romaniei will leave the Monetary Policy Rate at 6.25 percent today, according to all 19 economists in a Bloomberg survey. The central bank will announce its decision after 11 a.m. in Bucharest.

Central banks around the world are struggling to contain inflation as food prices advance and the price of oil rises amid turmoil in the Middle East. Romania increased its value-added tax ratelast year, which prompted the central bank to pause its rate-cutting cycle aimed at boosting the recession-hit economy.

The bank “doesn’t have any justification to cut rates yet” because of accelerating inflation and “it doesn’t mind a bit of currency appreciation right now,” said Raffaella Tenconi, a London-based economist at Bank of America Merrill Lynch, who sees the benchmark rate unchanged this year. “At this stage, inflation is purely externally driven.”

Policy makers stopped lowering borrowing costs in June after cutting rates four times to combat the worst recession on record and a 5 percentage-point government increase in the VAT to 24 percent that helped boost the inflation rate to 8 percent in December, the highest in more than two years.

The Ceska Narodni Banka kept its two-week repurchase rate at a record low since May, a quarter-point below the ECB’s benchmark. Czech policy makers voted 5-1 on March 24 to leave the rate at 0.75 percent. The Magyar Nemzeti Bank in Budapest kept its two-week deposit rate at 6 percent four days later.
Weak Recovery

“If the external shocks soften, domestic recovery remains weak and the leu appreciates, there is scope for a small loosening” of the central bank’s monetary policy, Tenconi said. Telephone bills, gasoline, rent and many other goods and services in Romania are gauged in euros and charged in lei, meaning a stronger leu has an immediate impact on inflation.

The inflation rate should remain between 7.2 percent and 7.5 percent “until the summer” and then begin to fall toward 4 percent at the end of the year, Governor Mugur Isarescu said on March 9. Consumer prices rose in February, more than economists had forecast, to 7.6 percent because of global fuel and food costs.

Tenconi forecast Romania’s inflation rate advanced to 7.8 percent in March, “remaining pretty high” because of food and non-food prices. The strengthening of the leu, which rose 3.9 percent against the euro so far this year, should help damp inflation, “but only on the margin,” Tenconi said.

The central bank raised its 2011 inflation forecast on Feb. 7 to 3.6 percent from a November forecast of 3.4 percent because of rising global fuel and food prices. The rate will probably drop to 3.2 percent in 2012.

-- With assistance from Barbara Sladkowska in Warsaw. Editors: Alan Crosby, Balazs Penz

To contact the reporter on this story: Irina Savu in Bucharest at

To contact the editor responsible for this story: James M. Gomez at

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