Romania Cuts Inflation Forecast in Boost to Rate-Cut Pledge

Romania’s central bank lowered its 2013 inflation forecast, bolstering a pledge to trim borrowing costs as price growth slows more than previously predicted.

The year-end inflation rate will probably be 3.2 percent, rising to 3.3 percent in 2014, within the central bank’s target of 1.5 percent to 3.5 percent, Governor Mugur Isarescu said today in Bucharest. That compares with a Feb. 7 estimate of 3.5 percent inflation for this year and 3.2 percent for next.

The Banca Nationala a Romaniei kept the benchmark interest rate at 5.25 percent, the European Union’s highest, for a ninth meeting on May 2, while paving the way for several rate cuts in the second half of the year as inflation slows. Policy makers are seeking to join an easing trend in central and eastern Europe to spur growth amid the euro-area recession.

“We pre-announced last week the start of a rate-cutting cycle that depends, of course, on economic data and our forecasts coming true,” Isarescu told a news conference on the bank’s quarterly inflation report. “The volatility of agricultural output has pushed us from agony to ecstasy as the inflation decline has sped up and we have elements that show our forecasts have an elevated probability of fulfillment.”

‘Tolerable’ Swings

The leu, the fourth-best performer against the euro this year among emerging-market currencies tracked by Bloomberg with a 3 percent gain, was 0.1 percent lower at 4.3204 at 5:21 p.m. in Bucharest.

Swings of 5 percent to 6 percent in the leu are “tolerable” as policy makers seek to maintain their grip on consumer-price growth, according to Isarescu, who declined to specify the starting level or time period to which he was referring.

“We don’t want to discourage exports but we’re seriously looking at the multiple balances on which lower inflation should be based,” he said.

The eastern European country’s central bank can accelerate rate reductions because inflation is easing quicker than previously thought, Isarescu told reporters last week.

Reserve Requirements

Policy makers may start trimming minimum reserve requirements for leu deposits once commercial banks resume lending, he said today. There are no plans to lower reserve ratios for deposits denominated in foreign currencies because the move would spur deleveraging, which has been orderly so far, according to Isarescu.

Romania’s inflation rate, the EU’s highest, fell more than estimated in March to 5.25 percent from 5.65 percent in February. April figures will be released by the National Statistics Institute on May 10.

Consumer prices will probably decline in August, with inflation likely to slow to within the bank’s target band in the third quarter, Isarescu said. The inflation rate will drop to as low as 3.2 percent this year, he said.

Risks to the inflation forecast include a possible increase in raw material prices and uncertainties over government plans to sell state assets and push through other “structural reforms,” according to Isarescu.

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.

While the central bank also predicts 2013 GDP expansion of 1.6 percent, the final figure may be higher because of agricultural output, Isarescu said.

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

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