Romania Sees More Monetary Easing After Main Rate Cut to New Low

Romania’s central bank cut its benchmark interest rate by a quarter point to a record low and said further easing is likely with inflation set to slow to within policy makers’ goal.

The Banca Nationala a Romaniei trimmed the rate to 4.25 percent from 4.5 percent, a third reduction in as many meetings, according to an e-mailed statement today. Fourteen of 18 economists in a Bloomberg survey predicted the cut, while four saw a half-point reduction. Minimum reserve requirements were left at at 20 percent for foreign-exchange deposits and 15 percent for leu deposits.

Policy makers, who kept borrowing costs unchanged for more than a year after a surge in inflation, resumed rate reductions in July, with consumer-price growth poised to slow within their 2013 target of 1.5 percent to 3.5 percent this month. The benchmark rate will be cut further in the coming months, according to Abbas Ameli-Renani, a strategist at Royal Bank of Scotland Group Plc in London.

“The resumption in disinflation has enabled a new cycle of monetary-policy easing in the context of the central bank effectively anchoring inflation expectations and closely monitoring domestic and external developments,” Governor Mugur Isarescu told reporters in Bucharest.

The leu has weakened 0.2 percent this year against the euro, the second-best performance among 24 emerging-market currencies tracked by Bloomberg. It traded little changed at 4.4628 per euro by 4:24 p.m. in Bucharest.

‘Feel Comfortable’

“I expect another 25 basis-point cut at the November meeting before the central bank brings an end to the easing cycle,” Ameli-Renani said by e-mail after the decision. “With inflation expected to fall within the central bank’s target and stay there until at least end-2014, the central bank will feel comfortable implementing at least another 25 basis-point cut.”

Consumer-price growth, which slowed to 3.7 percent from a year earlier in August, will probably decelerate to 3 percent this month after the government trimmed the value-added tax for bread to 9 percent from 24 percent, according to the bank’s projections. The inflation rate will drop to 3.1 percent by year-end, remaining at that level in 2014, it predicts.

The latest price data “reconfirm faster disinflation until the first part of 2014,” Isarescu said.

While lenders have been cutting deposit rates quicker than loan rates, preventing a 50 basis-point reduction in the benchmark today, policy makers will continue to trim borrowing costs, according to the governor.

Transmission Delays

“It won’t deter us,” Isarescu told reporters in Bucharest. Commercial banks have “significant room” to lower borrowing rates and help speed an economic recovery, he said.

As the end of the euro region’s two-year slump buoys export demand, Romania’s economy will expand 1.9 percent this year, the government predicts. The central bank cut borrowing costs by a total of 75 basis points in July and August after halting rate reductions last March as a drought stoked inflation.

Eastern European policy makers are diverging as their economies show varying degrees of recovery. Hungary’s central bank cut its benchmark interest rate to a record-low 3.6 percent Sept. 24, while Poland kept its main rate at a record low of 2.5 percent Sept. 4. The Czech Republic, where borrowing costs are effectively zero, refrained from announcing further policy easing through koruna sales at a meeting last week as its economy recovers from a record-long recession.

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 editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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