Tuesday, January 8, 2013

FT: Romania holds rates as inflation overshadows sluggish growth


The National Bank of Romania (BNR) kept its benchmark interest rate unchanged at 5.25 per cent on Monday, as policy makers juggled with the conflicting demands of meeting inflation targets and stimulating a flailing economy.
The Romanian leu strenthened slightly against the euro, to 4.40 lei to the euro after opening at about 4.42.
The bank said in a statement:
The NBR Board decided to keep the monetary policy rate unchanged at 5.25 per cent per annum, to ensure an adequate liquidity management in the banking system and to maintain the existing levels of minimum reserve requirement ratios on both leu- and foreign currency-denominated liabilities of credit institutions.
These decisions are aimed at resuming and consolidating disinflation, whose outlook is further marked by risks and uncertainties related to domestic developments, including the persistence of structural rigidities across the Romanian economy as well as the euro area and global economic recovery.
Dan Bucsa, economist with Unicredit Bank in London, told beyondbrics:”The decision was exactly my expectation. Despite falling in the last quarter, annual inflation in 2012 has probably fallen outside the plus or minus 1 point band around the 3 per cent target.”
Bucsa stressed that the inflation target for 2013 has been set lower, at 2.5 per cent, making the BNR even more cautious when it comes to easing rates. Indeed, he expects the bank to keep rates unchanged throughout 2013, after inflation ended 2012 at 3.6 per cent. That was a fairly good result, but just outside the 1 per cent band the bank sets around its target.
Bucsa argues that with economy spluttering, and a trend in neighbouring countries – notably Hungary – to cut rates, the central bank is unlikely to hike.
Bucsa wrote in a note: “The [Monetary Policy Council] doves have become more vocal lately, and we believe their stance reinforces a general bias against hikes,”
In Vienna, Erste Group analysts are of a similar mind. They noted that Romania’s fundamentals “remain robust” – pointing to “the conclusive progress in consolidating public finances even in the election year 2012” which is likely to lead to a budget deficit of just 2.7 per cent of GDP this year.
But Erste noted that the economy would continue to be “trailing behind its potential in 2013, with economic growth due to pick up slightly to 1.1 per cent.”
As a result, there will be little room for cuts, the bank says.
The outlook of depreciation pressures with a direct negative impact on the purchasing power of households and NPLs in the banking sector (17.34% as of the end of September), together with higher inflation prospects (4.3% in December 2013) leave little, if any, room for further monetary policy easing and helping the real economy. We expect the Central Bank to keep the key rate at 5.25%, but do not completely rule out a prospective hike. This would be consistent with the Central Bank’s thesis that financial stability has to be a priority, while economic growth can wait, especially for as long as predictability remains low and the confidence crisis persists.
Romania has some other positives: it is not so dependent on exports to the European Union as most of its peers (exports account for just 30 per cent of GDP) and, crucially, it should enjoy political stability in the immediate future, despite the rift between the president and government.
“The ruling coalition of Social-Democrats and Liberals (USL) will enjoy an unprecedented, more than 60 per cent support in parliament,” and as a consequence, the government should be free to implement a reliable governing program, Erste reasons.
However, Romania appears wedded to assistance from (and therefore meeting the requirements of) the International Monetary Fund and other lenders for some time to come, given the size of forthcoming debt repayments.
Erste Bank writes:
A new program with IFIs [international financial institutions] is seen as a necessary approach in order to maintain foreign investor confidence in the country’s macroeconomic dynamic balance, as well as to secure a financing buffer for the government in case of worsening conditions on international markets – [this] taking into account the FX repayment calendar of the MinFin and NBR to the IMF in the coming two years (EUR 5.2bn only in 2013). Maturing debt (mainly to the IMF for the funds drawn under the first stand-by agreement signed in 2009) and anticipations of a drop in FX reserves will put pressure on Romania’s currency, with the amplitude of the depreciation highly sensitive to the effective improvement of EU funds absorption and foreign direct investments inflows. Against this backdrop, we see the RON traded at between 4.4 and 4.7 against the EUR in 2013, with the ability of the MinFin to tap international markets in order to finance maturing external debt affecting local currency development.
Romania – or rather the Romanian population – has swallowed some hard medicine in the recent past. While the economy has moved in the right direction, the country is far from being out of the woods just yet.

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