Saturday, June 4, 2011

Romania May Have to Begin Monetary Policy Tightening, IMF Says

Romania’s central bank may have to tighten monetary policy in the coming months to mop up market liquidity as “significant” inflationary pressures build, International Monetary Fund’s Mission Chief Jeffrey Franks said.

The Banca Nationala a Romaniei, which has the European Union’s highest benchmark interest rate at 6.25 percent, has “to move to a tightening bias” to meet its inflation target of 3 percent, plus or minus one percentage point, next year, Franks said in a phone interview from Washington yesterday.

Policy makers around the world are struggling to contain inflation fueled by rising food and energy prices. Romania’s central bank left the main rate unchanged for a 12th consecutive month on May 3 and raised the inflation rate forecast for the end of the year to 5.1 percent from 3.6 percent. The inflation rate stood at 8.3 percent in April.

“There is no doubt that inflation pressures are significant in Romania right now,” Franks said. “There needs to be a move to a tightening bias, some mopping of liquidity would be appropriate, and then let’s see what the inflation forecasts look like for 2012. And if, at some point in the future there is a need, the central bank should act accordingly.”

The bank will try and limit exchange-rate volatility as “probable massive foreign capital inflows” put pressure on the leu to appreciate, Governor Mugur Isarescu said on May 25.

Inflows of capital to Romania will force the bank to make difficult monetary-policy decisions and use “unorthodox measures” to prevent exchange-rate volatility, according to Isarescu.

The leu has gained 3.5 percent against the euro this year, the third-best performer in central and eastern Europe after the Serbian dinar and the Hungarian forint, Bloomberg data show. It was at 4.1335 per euro yesterday in Bucharest.
‘Excessive’ Controls

“As the economy recovers, we don’t want to return into a situation where we had excessive capital inflows in Romania and where we had risks of pushing ourselves onto the high-inflation and high current-account deficit side,” Franks said. “We need to guard against both the downside risks and also excessive upside risks for the economy as we go into the next year or two.”

Romania’s current-account deficit narrowed 59 percent in the first quarter to 634 million euros ($919 million) as foreign direct investment into the Balkan country fell 22 percent to 379 million euros from 486 million euros in the same period of 2010.

Franks sees no signs of spillover effects to Romania through banks from the euro-region’s sovereign-debt crisis that made Greece take a 110 billion-euro rescue. Greece has a 50 percent chance of defaulting, Moody’s Investors Service said on June 1, when it downgraded its rating to Caa1 from B1, putting it on a par with Cuba.

The Mediterranean country is facing a funding gap of 30 billion euros next year and is shut out of the capital markets with yields on its 10-year bonds of more than 16 percent.

“The local subsidiaries of Greek banks are liquid and well capitalized,” Franks said.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; 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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