Wednesday, August 3, 2011

Romania to Leave Rates Unchanged to Aid Currency, Survey Shows

Romania will leave the European Union’s highest interest rate unchanged as policy makers aim to keep the currency stable and boost an export-driven recovery after inflation slowed, a survey of economists showed.

The Banca Nationala a Romaniei will probably keep its monetary policy rate at 6.25 percent today, according to all 11 economists in a Bloomberg survey. A decision is expected after 11 a.m. in Bucharest.

Romanian policy makers have kept the rate unchanged at each policy board meeting since June 2010 to contain inflation sparked by a tax increase and rising commodity prices. Surging exports have pulled the economy out of the worst recession on record, helped by industrial output growth and a currency that has been trading around current levels in the last year.

The bank will keep the rate unchanged as “the country’s economy is still hurt by fiscal austerity, high inflation and high interest rates,” said Elisabeth Andreew, chief foreign- currency strategist at Nordea Bank AB in Copenhagen. “On the other hand, inflation risks are still lurking, for example increased administered prices, and it’s also important to keep rates high to keep the currency stable.”

The leu, the fifth-best performer among more than 20 emerging-market currencies tracked by Bloomberg so far this year, has been trading between 4.1 against the euro and 4.3 per euro in the past year. Central bank Governor Mugur Isarescu said on July 15 he expects the leu to remain trading in that range.
Regional Trends

Central and east European policy makers have kept rates steady over the past month, with Poland and Hungary halting monetary-policy moves to assess a slowdown in inflation.

The Magyar Nemzeti Bank kept the two-week deposit rate at 6 percent on July 26, after the sovereign debt crisis weakened the forint to a record low against the Swiss franc, in which most Hungarian mortgages are denominated. The Narodowy Bank Polski left the seven-day interest rate at 4.5 percent last month after raising borrowing costs by 1 percentage point this year.

Neighboring Serbia last month cut its benchmark rate, the second highest in Europe, by a quarter point to 11.75 percent, the second decrease in as many months.

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

The International Monetary Fund, which granted Romania a two-year precautionary loan, forecasts an inflation rate of 5.5 percent for the year, according to Jeffrey Franks, the fund’s mission chief to Romania.

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, to counter possible energy-price increases, Franks said on Aug. 1 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,” Franks said at the time.

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, which the government expects to grow 1.5 percent this year compared with a contraction of 1.3 percent in 2010.

The central bank kept reserve requirements for leu deposits at 15 percent.

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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