Thursday, August 4, 2011

Romania’s Central Bank Leaves Rate on Hold for 10th Meeting

Romania’s central bank left its benchmark interest rate unchanged at a record low for a 10th meeting as inflation slows and policy makers seek to boost a recovery amid the U.S. and European debt crises.

The Banca Nationala a Romaniei left the main interest rate at 6.25 percent, matching the forecast of all 11 economists surveyed by Bloomberg. The bank left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

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. Romania, which has left the rate unchanged for more than a year, is also weighing whether the effect of last year’s tax increase on inflation has waned, while seeking to spur economic recovery.

“I think it’s the correct decision by the central bank because inflation will create further positive surprises, especially due to a very good agriculture output,” Lucian Anghel, chief economist at Banca Comerciala Romana SA, said by phone. “I think the central bank shouldn’t hurry with a tightening as the external environment is still uncertain.”

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.

The leu, the fifth-best performer among more than 20 emerging-market currencies tracked by Bloomberg so far this year, rose 0.1 percent to 4.2330 per euro as of 1:20 p.m. in Bucharest trading. Romania’s benchmark BET Index fell 1.4 percent to 5224.21.
Rate History

Policy makers have kept the rate steady since June 2010 after a value-added tax to meet international bailout pledges boosted inflation to the fastest in two years. Before that, the bank cut the rate four times to combat the worst recession in two decades and contain price growth after a 5 percentage-point VAT increase to 24 percent boosted consumer prices.

Romania’s inflation rate, the European Union’s highest, 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 rate may fall to between 3.8 percent and 5 percent in September, according to the most likely scenario, as a good farm harvest drives food prices lower and the effects of a government tax increase dissipate, central bank Governor Mugur Isarescu said on July 15.

“The inflation will slow substantially in July on base effects to as much as 5.5 percent, which is still far above the inflation target range and therefore no cut is justified,” Daniel Hewitt, a senior economist at Barclays Capital, said by phone. “The economy is spiraling downward, thus there is no pressure to raise rates and inflation will likely decline further. The only upside pressure will be from government adjustments of administrative price.”

The International Monetary Fund forecasts a 5.5 percent rate for the year, the lender’s Mission Chief to Romania Jeffrey Franks said on Aug. 1.

The central bank should keep a bias toward tightening monetary policy to counter possible energy-price increases even as inflation slows after the effect of last year’s tax increase wanes, Franks said in an interview.

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

No comments: