Wednesday, November 2, 2011

Romania Unexpectedly Lowers Benchmark Rate to Record-Low 6%

Nov. 2 (Bloomberg) -- Romania’s central bank unexpectedly cut its main interest rate for the first time in 19 months as slowing inflation gave policy makers room to spark economic growth during the euro-area’s sovereign-debt crisis.

The Banca Nationala a Romaniei lowered the monetary-policy rate to a record-low 6 percent from 6.25 percent, the Bucharest- based bank said in an e-mailed statement today. The decision matched the forecast of one of 15 economists in a Bloomberg survey. The other 14 expected no change.

The rate cut “is a very important signal considering the central bank has remained on hold for such a long time,” Raiffeisen Bank Romania’s Chief Economist Ionut Dumitru, who forecast the rate cut, said in a phone interview today. “It shows the bank’s strong belief that the inflation rate will remain low this year and next. The good track record of fiscal policy is giving the central bank room for further easing through other rate cuts in the future.”

Romanian policy makers resumed cutting rates to spur a faltering economic recovery and as inflation slowed faster-than- expected to the lowest level in two decades in September. Inflation may enter the central bank’s target band in 2011 for the first time in five years.

Central bankers left rates on hold after a July 2010 increase in the value-added tax rate to meet international bailout pledges boosted inflation to the fastest in two years. Before that, the bank lowered borrowing costs four times to combat the worst recession in two decades.

Leu Eases

The leu erased gains against the euro after the rate announcement, and rose 0.1 percent per euro to 4.3453 per euro as of 12:28 a.m. in Bucharest. The leu gained as much as 0.4 percent before the rate decision.

The Balkan nation is struggling to boost growth after exiting a two-year recession in 2011, helped by surging exports, as the debt crisis cools the economies of Romania’s main trading partners.

The economy, which is poised to grow 1.5 percent this year, will probably expand about 2 percent in 2012, compared with a previous estimate of 3.5 percent, according to the International Monetary Fund.

“Considering the external environment, the relatively high exposure from the banking sector to the eurozone periphery and a large share of foreign-exchange loans, we think that the decision today is somewhat premature and could put further pressure on the leu,” Nordea Bank AB’s Elisabeth Andreew wrote in a note to clients. “The bank must be confident about the inflation path and probably doesn’t see significant risks of capital outflows from the foreign banks.”

Inflation Target

Romania may meet the central bank’s inflation target in 2011 as a good harvest boosted supply and lowered food prices and the effects of the government tax increase fade, Deputy Governor Cristian Popa said on Sept. 29. Inflation will probably slow to about 3 percent next year, within the bank’s 2 percent to 4 percent target band, Popa said.

The inflation rate fell more than expected in September to the lowest level since the fall of communism, giving policy makers scope to cut the main rate. Annual consumer-price growth slowed to 3.45 percent from 4.25 percent in August.

Dumitru said the inflation rate may fall below 3 percent in October and rise to about 3.5 percent at the end of the year after a possible increase in administered prices. He estimates the rate to remain below 4 percent next year.

The Romanian central bank also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent. It will release a detailed statement on the decision in about three hours.

--With assistance from Andra Timu in Bucharest. Editors: Douglas Lytle, James M. Gomez

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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