Bloomberg News

Romania Holds Benchmark Rate as Cuts Beckon Amid Price Ease (2)

May 02, 2013

Romania’s central bank kept the European Union’s highest borrowing costs unchanged for a ninth meeting, while paving the way for a cycle of interest-rate cuts amid a faster-than-predicted slowdown in inflation.

The Banca Nationala a Romaniei left the benchmark rate at 5.25 percent today, according to an e-mailed statement, matching the estimates of all 19 economists surveyed by Bloomberg. It cut the overnight Lombard rate by 100 basis points and raised the deposit-facility rate by the same amount in a bid to lower rates on leu borrowing and curb money-market volatility.

“Our message is: we’ll start a cycle that we hope we won’t have to interrupt” because of the possible negative effect of poor weather on agriculture and the economy, central bank Governor Mugur Isarescu told reporters today in Bucharest.“This cycle will include several sessions of reductions of the monetary policy rate.”

Romania halted a rate-cutting cycle a year ago as poor agricultural output boosted food prices and a pledge to the International Monetary Fund and the EU to free energy tariffs increased utility bills. It’s seeking to join other countries in the region, which are dropping rates to spur growth as the euro area struggles with a debt crisis, as inflation will probably slow to within a targeted band in the second half of the year.

Leu Drops

Romania’s currency and bonds have rallied this year on increased demand from international investors after JPMorgan Chase & Co. and Barclays Plc included some of the country’s securities in their government-debt indexes last month.

The leu, eastern Europe’s best performer this year against the euro, traded at 4.3212 in Bucharest, down 0.1 percent from yesterday’s close, paring losses after the decision.

“Given recent improvements in fundamental factors, under a favorable disinflation perspective, a more benign exchange-rate environment and a still-negative output gap, the room for the central bank to start an easing cycle has enlarged,” Catalina Molnar, chief economist at UniCredit Tiriac Bank SA, said today by e-mail. “A bold decision for the National Bank would be to bring the key rate down to 4.5 percent by year-end. However any deterioration in perspectives in the short run could maintain the wait-and-see mode.”

Regional Trend

The bank cut the overnight Lombard rate to 8.25 percent from 9.25 percent and raised the deposit-facility rate to 2.25 percent from 1.25 percent. It left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

Romania can accelerate reductions in its main interest rate, joining other eastern European nations, because inflation is easing quicker than previously thought, Isarescu said.

Neighboring Hungary cut its main rate to a record-low 4.75 percent on April 23 to help its economy emerge from a recession as the inflation rate stood at 2.2 percent in March, the lowest in almost 39 years. Poland’s central bank also reduced its benchmark seven-day reference rate to 3.25 percent on March 6. The Czech Republic has kept the rate at 0.05 percent since last November and is expected to remain on hold at today’s meeting, according to a Bloomberg survey of 18 economists.

Romania’s inflation rate, the EU’s highest, fell more than estimated in March to 5.25 percent from 5.65 percent in February. The central bank has cut this year’s 3.5 percent forecast for price growth as demand waned, Isarescu said, without specifying the new estimate.

The central bank, whose end-2013 target range is 1.5 percent to 3.5 percent, will release revised projections May 8.

“We are currently looking for inflation to slope downwards more markedly in the second half of the year, following a more auspicious agricultural year,” Banca Comerciala Romana SA economist Dumitru Dulgheru wrote in a note after the decision.

Romania avoided a recession last quarter as gross domestic product rose a seasonally adjusted 0.4 percent from the previous three months. The economy is set to grow 1.6 percent this year, according to the European Commission.

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

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net


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