Bloomberg News

Romania May Refrain From Lowering Rates as Leu Hits Record Low

June 26, 2012

Romania’s central bank will probably refrain from cutting its benchmark interest rate after the sovereign-debt crisis and rising political unease helped push the leu to a record low.

The Banca Nationala a Romaniei will keep its monetary policy rate unchanged at 5.25 percent today, according to 18 out of 19 economists surveyed by Bloomberg. One forecast a cut by a quarter point. A decision will be announced after 11 a.m. in Bucharest.

“We expect the National Bank of Romania to maintain a dovish bias,” Christian Lawrence, a London-based currency strategist at Rabobank International, wrote in a note to clients before the rate announcement. “We do not think the bank will cut rates again in the near term.”

Central and eastern European central banks, including Hungarian and Romanian policy makers, are holding off from cutting rates to bolster recession-hit economies as the inflation outlook points to rising prices later in the year.

Hungary left its main rate at the highest in the European Union at 7 percent amid the fastest inflation in the 27-member bloc. Poland kept interest rates on hold on June 6. In the Czech Republic, where inflation has been above the central bank’s target for eight months, policy makers will lower borrowing costs to 0.5 percent from 0.75 percent tomorrow, according to 20 of 24 economists surveyed by Bloomberg.

Political Fight

Political bickering between Romanian Prime Minister Victor Ponta and President Traian Basescu and the European sovereign- debt crisis triggered a sell-off in the leu, which fell to an all-time low against the euro this month. It traded at 4.4563 per euro at 6:05 p.m. in Bucharest yesterday.

The turmoil may prompt policy makers to continue to shield the currency from further depreciation by keeping rates unchanged in a country which has changed governments twice this year.

The central bank left the rate alone on May 2 following a government collapse after cutting borrowing costs 1 percentage point to spur the economy in the previous meeting.

Inflation, which slowed to a two-decade low last month and helped policy makers lower the main rate, will probably quicken from May because of a statistical base effect, though the rate won’t exceed the 4 percent upper limit of a target range for this year, according to the central bank. It forecasts inflation of 3.2 percent at the end of 2012 before slowing to 3 percent next year.

Widening Deficit

Two days after Ponta’s Cabinet took office, the International Monetary Fund and the EU agreed to let the country widen its budget deficit to allow a public-sector wage increase to partly compensate for a 25 percent cut in 2010. Another wage increase is expected in January next year to fully restore wages to pre-austerity levels.

The budget-deficit target stands at 2.2 percent of economic output compared with an initial 1.9 percent goal, the IMF and the government said on May 9.

“The National Bank will keep the key rate unchanged because the external environment has not yet settled down and pressures on the foreign-exchange rate persist,” Banca Comerciala Romana SA analyst Florin Sinca wrote in a report to clients before the rate decision.

The new government’s looser fiscal-policy stance suggests that the Romanian central bank will remain on the “cautious side” with its monetary policy, BCR economists wrote in a separate note.

“Political tensions are now brewing between President Basescu and Prime Minister Ponta,” according to the BCR note. “For the time being, we see the central bank keeping the key rate on hold for the remainder of 2012 and even afterwards, and will continue to keep a close eye on both external and local developments.”

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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