Tuesday, February 5, 2013

Romania to Leave Main Rate at Record Low Amid Inflation Spike

By Irina Savu - Feb 5, 2013 

Romania will probably leave its main interest rate at a record low for the seventh meeting amid a spike in inflation as the economy stagnates.

The Banca Nationala a Romaniei will keep borrowing costs unchanged at 5.25 percent today, according to all 19 economists surveyed by Bloomberg. A decision will be announced after 11 a.m. in Bucharest and will be followed by a press briefing by Governor Mugur Isarescu.

Romanian monetary-policy makers halted a rate-cutting cycle in May, bucking an easing trend in the region needed to spur economic growth, as a government plan to deregulate energy prices and drought-driven food prices quickened inflation. The economy probably stagnated in 2012 and expansion will be slower than forecast this year, the International Monetary Fund said.

“With an eye to the feeble projected recovery in 2013, the central bank will continue its balancing act when faced with a heavy load of supply-side inflationary pressures stemming from administered price hikes,” Roxana Hulea, an economist at BRD- Groupe Societe Generale SA in Bucharest, said. There may be no change until the third quarter “to fight off potential second- round inflationary effects from the increases in regulated prices,” she said.

The leu was the world’s best-performing currency in January, rising 1.5 percent against the euro. It traded at 4.3179 late yesterday, down 0.06 percent from the previous close.
Easing Trend

Most central banks in the region are cutting rates to foster economic growth. Hungary cut its main interest rate for a sixth month on Jan. 29 to 5.5 percent, while Poland’s central bank cut its benchmark seven-day reference rate on Jan. 9 to 4 percent to spur a slowing economy.

Romania lowered rates 1 percentage point before pausing on May 2 after a government collapse and as economic growth slowed, adopting a wait-and-see stance, which the IMF deemed “appropriate,” according to Mission Chief Erik de Vrijer. Gross domestic product will expand 1.5 percent this year compared with zero growth last year, he said.

While the central bank left rates on hold for the past nine months, it has resorted to weekly liquidity operations to manage the currency under its managed-floating regime. The bank has set up a liquidity limit to commercial banks since October, which it has loosened over the past month, according to data published on its website.

‘Below Potential’

“With economic growth projected to run below potential over the medium-term, the National Bank has only limited space to employ the interest rate channel and is bound to continue deploying liquidity management measures,” BRD’s Hulea said.

Inflation quickened more than forecast in December to 4.95 percent, exceeding the central bank’s 2012 target, on rising food and electricity prices. The bank, which had targeted inflation of between 2 to 4 percent at the end of 2012, will also approve its quarterly inflation report today, which will be presented at a news conference in the coming days.

“We also expect the monetary authorities in Romania to keep policy on hold and to indicate that it may miss this year’s ambitious inflation target of 2.5 percent plus or minus 1 percentage point due to changes in administered prices,” Pasquale Diana, a London-based economist at Morgan Stanley, said in a report before the rate announcement.

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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