Jan. 16 (Bloomberg) -- Romania's central bank cut its key interest rate by half a percentage point to 16.5 percent, citing the drop in the inflation rate to a 15-year low for the decision.

The Bucharest-based National Bank of Romania said in an e- mailed statement today that it trimmed the intervention rate from 17 percent, the second cut in less than a month. The bank has now lowered the rate by 4.75 percentage points in the past year. The intervention rate, which was last cut on Dec. 19, is what the central bank pays commercial lenders for lei deposits.

``The short-term projection of the inflation rate was re- configured to include the effects of state-managed prices, the evolution of the leu's exchange rate, and a rise in income following tax adjustments,'' the bank said in its statement. It didn't elaborate on its new short-term inflation target.

Romania's inflation rate fell to 9.3 percent in December, the lowest annual rate since 1990, slightly higher than the 9 percent the government projected as part of the country's efforts to join the European Union in 2007. The inflation rate stood at 14.1 percent in 2003.

Romania's new government, which introduced a lower, 16 percent flat tax on both personal income and profit as of Jan. 1 to boost investments, has an annual inflation target of about 7 percent by the end of this year.

Before Jan. 1 Romania's highest tax bracket was 40 percent for personal income starting with those earning $400 a month, while the corporate tax rate was 25 percent.

Additional Cuts

The central bank said also cut the rate paid to commercial banks for compulsory reserves to 4 percent from 6 percent, while lowering the penalty interest rate for lack of reserves by banks held at the central bank to 37 percent from 45 percent.

The central bank said it also decreased the interest rate for loans it grants banks, also known as the Lombard rate, to 25 percent from 30 percent.

``The cut in the intervention rate reveals a precautious approach and suggests further cuts by the central bank at a similar pace of half a percentage point a month,'' ABN Amro Romania senior analyst Radu Craciun said today in a phone interview.

Craciun said he believed the central bank would likely give access to non-residents to make deposits in lei in March or April at the latest, as originally planned, part of a plan that will eventually make the Romanian currency fully convertible.

`Hot Money'

``The rate cuts announced today are aimed at discouraging inflows of so-called hot money,'' Raiffeisen Bank Romania treasury research manager Mihail Ion said in another interview. ``It looks like they've reached a pretty smart compromise.''

Ion explained that the cut in the rate paid to commercial banks for their compulsory reserves will have the same effect ``as if they cut the intervention rate by a whole percentage point.''

The central bank is preserving a higher intervention rate to keep inflation under control, while transferring the effects of the rate cut on compulsory reserves by banks on client deposits, Ion said. ``Clients, including non-resident ones when they get access to lei deposits, would get lower interest rates.''

The central bank in November started allowing for a stronger leu by cutting back on the sale of lei for euros to prevent ``speculative'' capital investments once it allows foreigners to make deposits in lei. The leu rose 7 percent against the euro and 10 percent against the dollar since the bank announced its decision Nov. 1.

National Bank of Romania Vice Governor Cristian Popa said in an interview last week that access by foreigners to lei deposits would be allowed in the first half of this year.

Popa wouldn't elaborate on whether the bank will keep to its original decision to allow foreigners access in April at the latest, pending a visit to the country on Jan. 26 by an International Monetary Fund's team, which is to assess the effects of the decision.

To contact the reporter on this story: Bogdan Preda in Bucharest at bpreda@bloomberg.net

Last Updated: January 16, 2005 08:11 EST