Wednesday, May 2, 2012

Romania Keeps Key Rate Unchanged at 5.25% on Political Turmoil

Romania’s central bank kept its benchmark interest rate unchanged for the first time in eight months, halting a series of cuts to protect the leu after it plunged to a record low because of the government’s collapse.

The Banca Nationala a Romaniei left its monetary-policy rate at 5.25 percent, the bank said today in an e-mailed statement. Six economists surveyed by Bloomberg after the government fell on April 27 forecast no change in rates. The median estimate of a survey of 17 economists prior to the turmoil expected a quarter-point cut. Governor Mugur Isarescu will hold a news conference at 3:30 p.m. in Bucharest.

The political turmoil in the Balkan country triggered a sell-off in the country’s currency, which fell to an all-time low against the euro on May 1 and prompted policy makers to shield the leu after lowering borrowing costs by one percentage point over four meetings to boost faltering economic growth.

“Looking ahead, we believe that the National Bank of Romania faces a tough balancing act between fending off depreciation pressures and avoiding an excessive rise in the Treasury’s cost of borrowing,” Citigroup Inc. economists Ilker Domac and Gultekin Isiklar said in a note to clients before the decision. “Against this backdrop, we argue that a quarter-point rate cut at the May Board meeting -- as we were predicting before -- is now unlikely on the back of higher political uncertainty and the leu weakening.”
Reserves Unchanged

The bank also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent, according to the statement.

Governments are crumbling across the European Union as German Chancellor Angela Merkel pushes for austerity to prevent the euro area from breaking up and a debt crisis from spreading. The ouster of Prime Minister Mihai-RazvanUngureanu took place as the International Monetary Fund and the EU were reviewing the country’s progress under a precautionary-loan accord.

President Traian Basescu moved to limit the turmoil after the no-confidence vote designating Victor Ponta, the head of the opposition Social Democrats, as Prime Minister, giving him 10 days to draw up his governing plan. He will seek a vote of confidence in Parliament on May 7.

The Social Democrats and Liberals toppled Unugureanu’s government with 235 votes in favor of toppling the administration, four more than the 231 needed to oust the Cabinet in the 460-member legislature.

Ungureanu was unable to fend off defections in the former ruling coalition in his first no-confidence motion. His predecessor, Emil Boc, survived 10 such votes before he stepped down Feb. 6 to ease political and social pressure stemming from anti-austerity nationwide protests.

Romania, which secured a 5 billion-euro ($6.61 billion) precautionary loan from the IMF and the EU in 2011 to protect it from the debt crisis, is trying to reassure investors it will keep fiscal discipline and cut the budget deficit to 1.9 percent of gross domestic product this year after 4.4 percent in 2011. It hasn’t drawn any funds so far.

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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