Bloomberg News

Romania Central Bank Leaves Key Rate on Hold for 5th Meeting

November 02, 2012

Romania left interest rates unchanged at a record low for a fifth meeting as policy makers weigh a faltering economic recovery against a temporary jump in inflation and turn to other means to prop up the leu.

The Banca Nationala a Romaniei kept its policy rate at a record-low 5.25 percent, the second-highest in the European Union, according to an e-mailed statement today. The decision matched the estimates of all 21 economists surveyed by Bloomberg.

“An updated forecast shows inflation will stay above the targeted band until the second half of next year” and “under these conditions, the bank’s board decided to keep the rate unchanged to anchor efficiently inflationary expectations and firmly manage banking sector liquidity,” Governor Mugur Isarescu said today.

The central bank has kept borrowing costs on hold since May, when it stopped cutting rates after political turmoil knocked the leu to a record low and a drought pushed inflation to its fastest in a year in September. The recent pickup in inflation is “transitory,” Isarescu said in Warsaw on Oct. 18.

“Although inflation is envisaged to stay outside the variation band around the target by the end of 2013, we believe that it won’t react to these supply shocks by raising the key rate,” Florentina Cozmanca, a senior economist at RBS Bank Romania, said in a note after the decision.

Leu Movements

The leu touched a one-month high after the rate announcement and traded at 4.5296 per euro as of 4:34 p.m. in Bucharest. Today’s advance extended gains this week to 0.6 percent, the second-best performer after the Polish zloty among central and eastern European currencies tracked by Bloomberg, after the central bank limited liquidity to commercial lenders for a fourth week, according to data compiled by Bloomberg.

Isarescu said the central bank is limiting liquidity at weekly repurchase operations and intervening in the foreign- exchange market to prop up the currency.

The bank’s operation “is obvious and it means that the action is efficient,” he said. “We are no longer prudent” since the bank started a firm liquidity management and “this reflects a tightening of the monetary policy.”

Policy makers will probably continue to cap weekly liquidity offered to commercial banks to support the currency, Banca Comerciala Romana SA economist Eugen Sinca said in an e- mailed note after the rate announcement. He expects the leu to trade at 4.55 per euro in December.

Inflation Report

The central bank also approved its quarterly inflation report, which will be published Nov. 7, according to the statement. It said it left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

“It’s important to observe the central bank change of language regarding the liquidity management in Romanian banking system: the term was changed from ‘‘adequate’’ to ‘‘firm,’’ suggesting that we could expect that the bank will continue to cap the amounts borrowed to commercial banks through repo operations,” RBS’s Cozmanca said.

Central banks in the region are cutting rates to boost their economies. Hungary cut its main interest rate on Oct. 30 for a third month to 6.25 percent and may consider further easing on concern about a recession, while the Czechs lowered their main rate to a record-low 0.05 percent yesterday.

Rate Decisions

Romanian policy makers lowered rates 1 percentage point before pausing on May 2 after the government collapsed and economic growth slowed. Gross domestic product (ROGDPQOQ:US) will grow 0.9 percent this year, compared with 2.5 percent last year, according to the International Monetary Fund.

Inflation accelerated more than forecast to 5.3 percent, the fastest in more than a year in September, as rising food and energy costs threaten to push price growth above the central bank’s target for this year. The bank has a 2012 inflation target of 2 percent to 4 percent.

To contact the reporter 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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