Bloomberg News

Romania Keeps Rate Unchanged at 5.25% on Political Turmoil

May 02, 2012

Romania’s central bank kept its main interest rate unchanged for the first time in eight months, halting a series of cuts after the currency plunged because of increased political risks.

The Banca Nationala a Romaniei left its monetary-policy rate at 5.25 percent, the Bucharest-based bank said today in an e-mailed statement. Six economists surveyed by Bloomberg after the government fell on April 27 forecast no change in rates. The median estimate of a survey of 17 economists prior to the turmoil expected a quarter-point cut.

The political turmoil in the Balkan country triggered a sell-off in the country’s currency, which fell to an all-time low against the euro on May 1 and prompted policy makers to shield the leu after lowering borrowing costs by one percentage point over four meetings to boost faltering economic growth, helped by a record-low inflation rate.

“Judging by the inflation rate, there’s probably more room for rate cuts, but the domestic and international situations are more complicated,” Governor Mugur Isarescu told reporters after the decision. “Both the restructuring of the European banking system and domestic political developments have put us in the position to interrupt the rate-cutting cycle.”

Leu Rebounds

The leu rebounded from its weakest on record against the euro today, gaining as much as 0.5 percent to 4.4138 per euro and was trading at 4.4165 by 5:30 p.m. in Bucharest. The leu reached an all-time intraday low of 4.4620 yesterday after the government collapse, mainly driven by London- and New York-based investors as the Romanian market was closed for a public holiday, Isarescu said.

“We are carefully watching the leu moves and we can hardly say the current level is high, it’s only a bit higher as we are talking about a depreciation of only 2 percent since December,” Isarescu said. “The leu has stabilized on its own today even though it breached a psychological ceiling of 4.4 per euro.”

Governments are crumbling across the European Union as German Chancellor Angela Merkel pushes for austerity to prevent the euro area from breaking up and a debt crisis from spreading. The ouster of Prime Minister Mihai-Razvan Ungureanu took place as the International Monetary Fund and the EU were reviewing the country’s progress under a precautionary-loan accord.

Ending Cycle

The central bank is considering a scenario to end its easing cycle, “even though it’s not a desirable outcome,” depending on domestic and international factors, Isarescu said.

Today’s decision signals that “policy makers care more about the markets than about the economy, they don’t want financial havoc,” said Aurelija Augulyte, an emerging-market economist at Nordea Bank AB in Copenhagen.

The bank also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent, according to the statement. The bank also approved its quarterly inflation report, which will be made public during a press conference on May 8.

The leu decline will have a limited impact of 0.1 percentage points to 0.2 percentage points on the country’s inflation rate, which will probably drop to around 2 percent by May from 2.4 percent in March, Isarescu said.

President Traian Basescu moved to limit the turmoil after the no-confidence vote designating Victor Ponta, the head of the opposition Social Democrats, as Prime Minister, giving him 10 days to draw up his governing plan. He will seek a vote of confidence in Parliament on May 7.

Romania, which secured a 5 billion-euro ($6.6 billion) precautionary loan from the IMF and the EU in 2011 to protect it from the debt crisis, is trying to reassure investors it will keep fiscal discipline and cut the budget deficit to 1.9 percent of gross domestic product (ROGDPQOQ:US) this year after 4.4 percent in 2011. It hasn’t drawn any funds so far.

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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