Wednesday, April 6, 2011

Romania Faces Monetary-Policy ‘Dilemma’ in Inflation Fight

Romania’s central bank faces a “dilemma” as policy makers can’t cut interest rates aimed at stemming capital inflows while battling accelerating inflation, an adviser to the bank said.

The bank will strictly control market liquidity and carry on fine-tuning policy “for a while,” as it tries to tame consumer prices boosted by higher global fuel and food costs, Lucian Croitoru, a monetary-policy adviser to Governor Mugur Isarescu, told reporters in Bucharest today.

The Banca Nationala a Romaniei left its key rate unchanged at a record-low 6.25 percent on March 31 for a seventh meeting in a row and cut foreign-exchange reserve requirements by 5 percentage points to 20 percent, leaving commercial banks more money to lend to spur the recession-hit economy. Romania is trying to lower the European Union’s highest inflation rate of 7.6 percent in February that sprang from a government tax increase and rising prices worldwide.

“Inflationary expectations are no longer well-anchored,” Croitoru said. “The central bank can control only demand and influence supply” through the exchange rate “but the currency appreciation is dragging down the economy, while having a limited impact on reducing the inflation rate.”
Borrowing Cycle

Policy makers stopped lowering borrowing costs in June after cutting rates four times to combat the worst recession on record. A 5 percentage-point government increase in the value- added tax in July to 24 percent helped push the inflation rate to 8 percent in December, the highest in more than two years.

Romania’s leu, the second-best performer in eastern Europe after the Hungarian forint so far this year, gained 2 percent in March because of an improved economic outlook and after the central bank signaled last month that it may allow further gains in an attempt to damp inflation. The leu rose 0.2 percent to 4.1150 per euro as of 5:41 p.m. in Bucharest.

The leu’s appreciation will have a minor impact damping inflation in March, Croitoru said. “I don’t think the bank intervened in March to support the leu,” he said.

Romania’s economy, mired in a two-year contraction, is poised to recover this year and grow 1.5 percent, according to International Monetary Fund and government forecasts. It posted a smaller annual decline than expected in the fourth quarter and 0.1 percent quarterly growth, bolstering forecasts that growing exports and industrial production will end the slump this year.

To contact the reporters 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

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