Tuesday, May 3, 2011

Romanian Central Bank May Leave Benchmark Rate at European Union’s Highest

Romania’s central bank will leave its benchmark interest rate unchanged for the eighth meeting as the European Union’s highest borrowing costs boost the leu, helping combat inflation, a survey showed.

The Banca Nationala a Romaniei will leave its monetary policy rate at 6.25 percent today, according to all 11 economists in a Bloomberg survey. The bank will announce its decision after 11 a.m. in Bucharest.

Central banks around the world are struggling to rein in accelerating inflation as global food and oil price rise amid turmoil in the Middle East. Romania raised its value-added tax last year to generate revenue and narrow the budget deficit, prompting the monetary policy makers to halt a rate-cut cycle aimed at helping the economy recover from a recession.

“The exchange rate appears to be a more efficient instrument than the policy rate in containing inflation pressures, and so it is likely for the central bank to focus more on it,” Raiffeisen Romania SA economist Nicolae Covrig wrote in a note to clients before the decision.

The leu has gained 4 percent against the euro in the past three months, the best performance among more than 20 emerging- market currencies tracked by Bloomberg. It traded at 4.0929 as of 6:57 p.m. yesterday in Bucharest.

The central bank may allow the leu strengthen to help bring the inflation rate within its target this year, Catalin Pauna, the World Bank’s economist to the country, said in a Bloomberg interview on April 19.
Halting Cuts

Several countries in the region, including Hungary, Poland and Russia have started raising interest rates since last year to slow price increases. The European Central Bank last month boosted borrowing costs for the first time in almost three years.

Romanian policy makers stopped cutting the rate in June 2010 after lowering it four times to combat the worst recession in two decades and contain price growth after a 5 percentage- point increase in the VAT to 24 percent boosted consumer prices.

The inflation rate rose to 8 percent in March from 7.6 percent in February, the highest in 2 1/2 years, on rising food and fuel costs.

“Due to rising risks on the inflation front and the deterioration in forward-looking expectations, we believe that the central bank is more likely to keep rates on hold in 2011,” Istanbul-based Citigroup Inc. economists Ilker Domac and Gultekin Isiklar wrote in a note to clients.

Inflation to Slow

The central bank, which aims to keep price growth between 2 percent and 4 percent this year, may raise raise its 2011 inflation forecast to as much as 5 percent from 3.6 percent, Adrian Vasilescu, an adviser to Governor Mugur Isarescu, said on April 12. Inflation will probably slow “substantially” in the second half of the year, Pauna said.

The central bank lowered foreign-exchange reserve requirements by 5 percentage points to 20 percent on March 31, leaving commercial banks including Banca Comerciala Romana SA, owned by Erste Group Bank AG, BRD-Groupe Societe Generale (BRD) SA and Banca Transilvania (TLV) SA more money to lend to spur the economy.

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

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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