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Romania Cuts Benchmark Interest Rate for Third Time in a Row

Romania’s central bank cut its benchmark interest rate for the third time in as many meetings as a record-low inflation rate makes room for further easing this year to boost economic growth amid Europe’s debt crisis.

The Bucharest-based Banca Nationala a Romaniei lowered the monetary policy rate to a record-low 5.5 percent from 5.75 percent, it said today in an e-mailed statement. The reduction was expected by 13 of 15 economists surveyed by Bloomberg. Two forecast no change.

Romania’s central bankers resumed its monetary-policy easing in November last year, bringing the rates down by a total 75 basis points, after an 18-month pause, as the debt crisis has prompted central banks across the globe, including the euro-area, Brazil, Chile, Moldova, Russia and Serbia, to lower borrowing costs to contain an economic slowdown.

“The gradual and judicious adjustment of real broad monetary conditions will help effectively anchor expectations throughout the projection horizon given the outlook for inflation,” the bank said in a statement. A “new forecast reconfirms the perspective of inflation staying within the variation band around the 3 percent target throughout the projection horizon.”

Minimum-Reserve Requirements

Additionally the bank left its minimum-reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent, according to the statement. The bank also approved its quarterly inflation report, which will be presented by Governor Mugur Isarescu in a press conference on Feb. 7.

“Inflation has moderated substantially, and with the domestic demand story still weak, the central bank has room to provide monetary stimulus,” Roderick Ngotho, the London-based emerging-markets currency strategist at Royal Bank of Scotland Group Plc. said after the announcement. “We expect a policy rate range of 5 percent to 5.5 percent for 2012. We are now at 5.5 percent, there is room for further easing, but understandably, the central bank could choose to spread out the additional cuts.”

The leu was little changed at 4.3484 per euro as of 4:39 p.m. in Bucharest. The Romanian currency has lost 0.5 percent against the euro so far this year, compared with gains of 7 percent for the Hungarian forint, 6.2 percent for Poland’s zloty and 1.5 percent for the Czech koruna in the same period.

Exchange-Rate Outlook

“As in line with expectations, we do not expect any exchange-rate reaction,” Ngotho said. “Furthermore, we think that the euro-leu rate will be relatively stable over the coming weeks, even as other currencies see some appreciation.”

Economic growth will probably slow this year to between 1.8 percent and 2.3 percent on falling exports to western Europe, after growing faster than the International Monetary Fund’s estimate last year, Jeffrey Franks, the fund’s mission chief to Romania, said on Nov. 7. Gross domestic product rose 2.5 percent in 2011, Franks estimated.

The IMF may lower its growth forecast for Romania this year to as low as 1 percent, Ziarul Financiar reported on Jan. 30, citing unidentified people. The economy may expand between 1 percent and 1.5 percent in 2012, the newspaper said.

Romania’s inflation rate will probably fall to below 2 percent in the second quarter from 3.1 percent in December and end this year at 3 percent, making room for further interest-rate reductions, central bank Deputy Governor Cristian Popa told reporters at a Euromoney conference in Vienna on Jan. 17.

‘Unfavorable’ Effects

The bank estimates inflation will continue to slow in the “immediately forthcoming period,” before accelerating in the second half of the year because of “an unfavorable statistical base effects,” according to the statement. The rate won’t overshoot the bank’s inflation target band of between 2 percent to 4 percent for this year, it said.

“Despite financial turmoil on the external markets, local developments point to further rate cuts to support an already slowing economy, and we see expect the easing to continue to 5.25 percent by June,” said Monica Croitoru, a Bucharest-based economist at BRD-Groupe Societe Generale SA, in a note to clients today. “We believe the central bank will announce an upwards revision for the 2012 year-end inflation from the current 3 percent” because of rising food prices stemming from an “underperformance of the agriculture sector.”

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