Tuesday, August 2, 2011

Romania May Need to Raise Interest Rates Later in Year, IMF’s Frank Says

Romania’s central bank may have to raise interest rates this year to counter possible energy-price increases, said Jeffrey Franks, the International Monetary Fund’s mission chief for the country.

The central bank should keep a bias toward tightening monetary policy even as inflation is expected to slow after the effect of last year’s tax increase wanes, Franks said today in an interview in Bucharest. It also should refrain from reducing the amount of foreign currency banks are required to hold because it “would be unwise at the moment,” he said.

“The early indications that we get from inflation for July seem to be quite good, so pressure has eased a bit,” Franks said. “We would still advise the central bank to keep a tightening bias, to be prepared to go up rather than down, but the key is to see what happens in July and August.”

The Banca Nationala a Romaniei left its benchmark interest rate unchanged at 6.25 percent for a 13th month June 29 to tame inflation sparked by a 5 percentage-point increase in the value- added tax and rising global commodity prices. The central bank expects inflation to slow to less than 5 percent in September as a good harvest drives food prices lower.

Romania’s inflation rate unexpectedly fell to 7.9 percent in June from an almost three-year high of 8.4 percent in the previous month. The central bank targets an inflation rate of 3 percent, plus or minus one percentage point, for this year and next and expects the rate to end the year at 5.1 percent. The IMF forecasts a 5.5 percent rate for the year, Franks said.
‘Still Advisable’

“We know the inflation rate is going to drop in July and here food prices from the agricultural harvest should be helpful,” Franks said. “In the rest of the year there will perhaps be some increases in administered prices that are necessary for public enterprises, so we have to weigh this all in and I think caution is still advisable.”

Investor interest in Romania will probably increase after Fitch ratings raised the Balkan nation’s sovereign-debt rating to investment grade last month, Franks said.

Still, Romania must “calibrate” its plans to sell state assets and set attractive prices to avoid discouraging investors after it postponed an offering of shares in OMV Petrom SA (SNP), Romania’s largest oil company, Franks said.

Romania last month failed to sell a 9.8 percent Petrom stake valued at about 2.07 billion lei ($704 million) as the euro-region debt crisis made investors wary of bidding for the shares. The government said July 26 that it will try to revive the sale in the first half of next year.
Stake Sales

The government must choose the right timing and price for the stakes it plans to sell in utilitiesTranselectrica SA (TEL) and Transgaz SA this year because of the market turmoil triggered by a worsening of the euro-debt crisis, he said.

The government should also strive to meet the timetable for a planned sale of a majority stake in chemical company Oltchim SA this year, Franks said. The sale of a majority stake in CEC Bank, Romania’s last-remaining state-run bank, would be “an attractive target,” he said.

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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