Bloomberg News

Romania Has Room for Rate Cuts as Inflation Slows, Isarescu Says

November 07, 2011

Nov. 7 (Bloomberg) -- Romania’s slowing consumer-price growth creates room to reduce borrowing costs and monetary policy makers will have to adjust interest rates without disrupting the leu, central bank Governor Mugur Isarescu said.

Inflation will probably ease to 3.3 percent next month and 3 percent by the end of 2012 from 3.45 percent in September, Isarescu said at a press conference in Bucharest today. The Banca Nationala a Romaniei earlier forecast a 4.6 percent rate for end-2011 and 3.5 percent a year later.

Romania unexpectedly cut the monetary policy rate by 25 basis points to a record-low 6 percent on Nov. 2 to spur an economic recovery as inflation slowed more than expected, reaching the lowest level in two decades. A day later, the European Central Bank lowered its benchmark interest rate as the debt crisis drags the euro-area economy toward recession.

“There is pretty significant room for an easing cycle, but we don’t want to disrupt the current balances,” Isarescu said. “This isn’t about fear, one doesn’t have to prove courage by hitting one’s head against a steel wall. We are prudent because we know how quickly things could deteriorate.”

The leu strengthened 0.2 percent against the euro to trade at 4.3541 at 2:23 p.m. in Bucharest. The Romanian currency has lost 1.7 percent this year, the sixth-best performance among more than 20 emerging-market currencies tracked by Bloomberg.

‘Mind These Risks’

Regulated prices, risk aversion and volatile capital flows may boost inflation in the medium term, Isarescu said. Policy makers will also monitor the developments of the European debt crisis, he said. The central bank will next meet to set interest rates on Jan. 5.

“Our next rate-setting decision scheduled for January will have to take into account what happens in Greece,” Isarescu said. “We have to mind these risks because they influence our capital flows.”

Cutting interest rates more than 0.25 percentage points would diverge from the central bank’s “normal behavior” and raise questions about its motivation without giving commercial lenders enough time to adapt their products, Isarescu said.

The inflation rate may fall to less than 2 percent by March, Isarescu said. Economic growth may be between 2 percent and 3 percent in 2012, he added.

--Editors: Balazs Penz, Andrew Langley

To contact the reporters on this story: Irina Savu in Bucharest at isavu@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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