Tuesday, October 11, 2011

Romania Likely to Cut Rates After Budget Accord, Slow Inflation

Oct. 10 (Bloomberg) -- Romania probably will cut interest rates after an accord is reached on the 2012 budget with the International Monetary Fund and the European Union and inflation slows to within target, a central bank economist said.

The Banca Nationala a Romaniei kept the EU’s main rate at 6.25 percent for an 11th meeting on Sept. 29, refraining from a cut that would spur capital outflows and weaken the leu. The next rate-setting meeting is scheduled for Nov. 2.

“This reduction couldn’t have been done in a rush,” said central bank Chief Economist Valentin Lazea told Hotnews.ro. It can’t “be done before the 2012 budget parameters are agreed with the International Monetary Fund and the European Union in early November.”

Central banks across the region are seeking to balance the risks of slower growth in western Europe, the main importer of goods from their eastern neighbors, and weaker currencies as investors cut their exposure to emerging-market assets.

The leu, the seventh-best performer among more than 20 emerging-market currencies tracked by Bloomberg so far this year, weakened 0.1 percent to 4.3126 per euro as of 2:47 p.m. in Bucharest trading. It rebounded from its weakest in 15 months against the euro reached last week.

Romanian policy makers are targeting an inflation rate of between 2 percent and 4 percent for this year and next. They have kept interest rates stable since June 2010 as they assess the impact of the global slowdown and fading effect of a tax increase on prices.

Rate Target

The inflation rate probably fell to between 3 percent and 4 percent in September, entering the central bank’s target, after dropping to the lowest in 17 months in August, central bank Governor Mugur Isarescu said on Oct. 5. The rate declined to 4.25 percent in August from 4.85 percent in July, the lowest since March 2010.

An IMF-led mission will visit Romania between Oct. 25 and Nov. 7 to conduct the third review under a 5 billion-euro ($6.8 billion) precautionary loan, the Washington-based lender said on Oct. 7.

The IMF will probably lower Romania’s 2012 economic growth forecast, a key parameter for next year’s budget, to as low as 2 percent from the current 3.5 percent, IMF Mission Chief Jeffrey Franks said in an interview on Sept. 29.

--Editors: James M. Gomez, Alan Crosby

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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