Romania Unexpectedly Lowers Benchmark Rate to Record-Low 6%
November 03, 2011, 2:00 AM EDTBy Irina Savu
(Updates with central bank comments from third paragraph, leu in seventh.)
Nov. 2 (Bloomberg) -- Romania’s central bank unexpectedly cut its main interest rate as slowing inflation gave policy makers room to spark an economic recovery amid the euro-area’s sovereign-debt crisis.
The Banca Nationala a Romaniei lowered the monetary-policy rate to a record-low 6 percent from 6.25 percent, the Bucharest- based bank said in an e-mailed statement today. The decision matched the forecast of one of 15 economists in a Bloomberg survey. The other 14 expected no change.
“For the months ahead, disinflation is envisaged to consolidate against the background of maintaining a prudent monetary policy stance,” the central bank said in a statement after the decision. “However, the balance of medium-term risks is still asymmetric, as they relate to external developments, investors’ risk aversion and capital flow volatility.”
Romanian policy makers resumed cutting rates to spur a faltering economic recovery after inflation was the slowest in two decades in September. Inflation may enter the central bank’s target band in 2011 for the first time in five years.
Central bankers left rates on hold after a July 2010 increase in the value-added tax rate to meet international bailout pledges boosted inflation to the fastest in two years. Before that, the bank lowered borrowing costs four times to combat the worst recession in two decades.
The cut “is a very important signal considering the bank has held rates for such a long time,” Raiffeisen Bank Romania’s Chief Economist Ionut Dumitru, who forecast the rate cut, said by phone. “It shows the bank’s strong belief that the inflation rate will remain low this year and next. The good track record of fiscal policy is giving the central bank room for further easing through other rate cuts in the future.”
Leu Eases
The leu erased gains against the euro after the announcement, and rose 0.1 percent per euro to 4.3482 per euro as of 3:40 p.m. in Bucharest. The leu gained as much as 0.4 percent before the rate decision.
The Balkan nation is struggling to boost growth after exiting a two-year recession in 2011, helped by surging exports, as the debt crisis cools the economies of Romania’s main trading partners.
The economy, which is poised to grow 1.5 percent this year, will probably expand about 2 percent in 2012, compared with a previous estimate of 3.5 percent, according to the International Monetary Fund.
External Environment
“Considering the external environment, the relatively high exposure from the banking sector to the eurozone periphery and a large share of foreign-exchange loans, we think that the decision today is somewhat premature and could put further pressure on the leu,” Nordea Bank AB’s Elisabeth Andreew wrote in a note to clients. “The bank must be confident about the inflation path and probably doesn’t see significant risks of capital outflows from the foreign banks.”
Romania’s inflation rate will probably remain inside the variation band around the central targets of 3 percent in 2011 and 2012, as a good harvest boosted supply and lowered food prices and the effects of the government tax increase fade away, the bank said in the statement. The bank approved its quarterly inflation report today, which it will publish on Nov. 7.
‘Judicious Adjustment’
“The judicious adjustment of the central bank’s stance is aimed at steadily ensuring adequate real broad monetary conditions to secure a lasting maintenance of inflation inside the variation band around the targets and financial stability,” according to the statement.
The inflation rate fell more than expected in September to the lowest level since the fall of communism, giving policy makers scope to cut the main rate. Annual consumer-price growth slowed to 3.45 percent from 4.25 percent in August.
Dumitru said the inflation rate may fall below 3 percent in October and rise to about 3.5 percent at the end of the year after a possible increase in administered prices. He estimates the rate to remain below 4 percent next year.
The Romanian central bank also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.
--With assistance from Andra Timu in Bucharest. Editors: Douglas Lytle, James M. Gomez
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
