Bloomberg News

Factors Show ‘Gradual’ Romanian Rate Cut, Central Bank Says

September 29, 2011

(Updates with additional comment from central bank in sixth paragraph, analyst comment in 11th.)

Sept. 29 (Bloomberg) -- While a reduction in Romanian interest rates was not possible today because of “persistent uncertainties” in the European debt crisis, a cut in borrowing costs in the future is possible, central bank adviser Lucian Croitoru said.

“Today was not the right moment for a monetary-policy easing because of all the persistent uncertainties tied to the European debt crisis,” Croitoru said in e-mailed comments to Bloomberg. “Of course there are some factors that point to a gradual interest-rate cut in the future.”

The Banca Nationala a Romaniei kept the main rate for an 11th meeting at 6.25 percent, the European Union’s highest, in a decision that was expected by all 13 economists surveyed by Bloomberg. It also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

“There are some factors that fuel disinflation, but there are also uncertainties over capital flows, administered prices and a slowdown in exports linked to foreign demand, which justified today’s decision,” Croitoru said.

Central banks across the region are seeking to balance the risks of slower growth in western Europe, the main importer of goods from its eastern neighbors, and weaker currencies as investors cut exposure to emerging-market assets. Romanian policy makers have kept interest rates stable since June 2010 as they assess the impact of the global slowdown and fading effect of a tax increase on prices.

‘Persistent Uncertainties’

The economic prospects reveal a consolidation of disinflation, “but also persistent uncertainties” related to developments in the external environment, capital flows, as well as administered and some volatile prices, the central bank said in a separate statement.

“Therefore, the central bank will gradually adjust the monetary policy stance, in line with these developments and in the context of fulfilling the Romanian authorities’ commitments under the external financing arrangements with international institutions,” it said.

“The current monetary policy remains adequate and it has led to the resumption of the disinflation trend, and I think that the central bank will continue to promote a policy that will bring the inflation within its targeted band this year and in the future,” he said in the e-mail.

Inflation Rate

Romania’s inflation rate fell to the lowest in 17 months in August, dropping more than economists forecast, as a bumper harvest boosted food stocks. It declined to 4.25 percent from 4.85 percent in July, the lowest since March 2010, the National Statistics Institute said Sept. 12.

“The high volatility of food prices has lessened and it’s been more than a year since the government raised the value- added tax, so we can now safely say the two main factors that prompted the central bank to pause its rate-cutting trend are fading away rapidly,” Croitoru said.

“We recognize that a more benign inflation outlook in the near-term and difficult growth prospects have raised the probability of a rate cut this year,” analysts at Citibank wrote in a commentary today. “Nonetheless, we still think the” central bank will “keep rates on hold at 6.25% during the remainder of the year.”

Economic growth slowed to 1.4 percent from a year earlier in the second quarter compared with 1.7 percent in the first. Romania is on track to meet a forecast of 1.5 percent growth for this year, Prime Minister Emil Boc said on Aug. 17.

--With assistance from Douglas Lytle in Prague. Editors: Alan Crosby, Douglas Lytle

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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