Romania Keeps Rate on Hold for 3rd Time Amid Turmoil

Romania’s central bank left its benchmark interest rate unchanged for a third consecutive meeting as political turmoil that sank the leu to a record low outweighed concern about a deepening recession.

The Banca Nationala a Romaniei kept its monetary policy at a record-low 5.25 percent today, according to an e-mail from the bank. Today’s decision matched the estimates of all 12 economists surveyed by Bloomberg News.

“Heightened risk aversion, against the background of an unfavorable external environment and of possibly persistent domestic political tensions, calls for further maintaining a prudent monetary-policy stance,” the central bank said in a statement.

Political wrangling between the president and the prime minister, which led to a presidential impeachment vote last week, weakened the leu 3.5 percent against the euro in July, preventing the central bank from moving ahead with rate cuts needed to help pull the economy out of a second recession in three years.

The leu, the world’s second-worst performing currency in July after the Sudanese pound, declined as much as 0.5 percent to 4.6318 per euro and was trading at 4.6250 at 6:26 p.m. in Bucharest after the Constitutional Court postponed ruling on whether the impeachment referendum was valid until Sept. 12.

Debt Crisis

As Europe’s debt crisis threatens to throw the 17-nation economy into a recession, central and eastern European central banks are cutting rates or weighing the merits of policy easing on their export-driven economies.

Romanian inflation, which had slowed to a record low by May, accelerated for the first time in eight months June and will probably end 2012 at 3.2 percent because of an unfavorable statistical base effect on food prices, the central bank forecast in May. Slowing price growth, fueled by weak domestic demand and a bumper harvest in 2011, enabled policy makers to lower the main rate four times before pausing in May and June.

Inflation will probably accelerate in the third quarter, even as it remains within the bank’s target range of 2 percent to 4 percent this year and next, Governor Mugur Isarescu told reporters at a briefing today.

The central bank “again opted for prudence due to a potential increase in inflation to 3.7 percent in December from 2 percent in June, external pressures on the leu and domestic political jitters,” Eugen Sinca, a Bucharest-based analyst at Banca Comerciala Romana SA, said in an e-mail after the rate announcement.

Reserve Demands

Romania’s central bank today also kept its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent. It will probably leave the main interest rate on hold this year, the median estimate of seven economists in a Bloomberg survey shows, as the row continues between President Traian Basescu and Premier Victor Ponta’s coalition before elections in November or December.

Neighboring Hungary has also kept its rate unchanged for seven months amid stalled aid talks with the International Monetary Fund and the European Union and a worsening inflation outlook. It may cut the rate by the end of this year as the economy slides into recession. The Czech Republic held its main rate today after lowering it in June for the first time in two years to combat an economic slump.

Romania fell into a recession in the first quarter as government spending cuts hampered consumption and freezing weather curbed exports. Gross domestic product growth will probably slow to 1.5 percent this year compared with 2.5 percent in 2011, according to IMF and EU forecasts.

The GDP forecast may be lowered to below 1.5 percent this year as “sufficient data,” including lower agricultural output, point to a further slowdown, Isarescu said.

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