January 5, 2012 11:00 am by Stefan Wagstyl
Romania, which in November became the first European Union country to cut interest rates in response to the eurozone crisis, on Thursday again sliced borrowing costs, with the the central bank trimming rates by a quarter point to 5.75 percent.
With investors’ nerves about Hungary undermining confidence across the region, Bucharest is taking a bit of a gamble with the exchange rate. But with the leu slightly higher against the euro than it was before the November cut, the National Bank of Romania has probably made the right call, given declining inflation and slowing growth.
The leu weakened slightly on Thursday’s announcement, shedding around 0.3 per cent. But it was trading around midday local time at around 4.34 to the euro, compared to a recent low of 4.38, just after the November rate cut. The leu was the strongest currency in CEE last year, losing just 2 per cent.
Inflation eased in November to 3.4 per cent, compared to the central bank’s target range of 2-4 per cent. So economists see scope for further modest cuts in the coming months.
Dan Bucsa, chief economist at Unicredit Tiriac Bank, told Reuters:
There is still scope for further rate cuts, since the real interest rate (computed using the central bank’s inflation forecast) stands at 2.75 percent, too high for the current economic situation. Given that foreign demand is expected to weaken in H1 2012, a boost to domestic demand via laxer monetary conditions is welcome.
The Romanian authorities are trying to avoid recession while maintaining financial stability in difficult times. The government has adopted a tight budget which aims to more than halve the deficit from 4.4 per cent of GDP in 2011 to 1.9 per cent in 2012.
Unlike Hungary, Romania has accepted the need to stay on good terms with the International Monetary Fund and the European Union which have put in place a precautionary $5bn credit line.
But the government’s plans depend on achieving a GDP growth rate of over 2 per cent in 2012 – a challenge given the crisis in the eurozone, Romania’s biggest trade and finance partner.
So, while the central bank in Bucharest is steering what looks like the right course, there’s not much it can do about the state of the choppy seas in which it finds itself.
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