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Romania Keeps EU’s Highest Rate on Hold to Assess Inflation

Romania kept its main interest rate at a record low for an eighth meeting as central bankers wait for inflation to slow to make room for policy easing.

The Banca Nationala a Romaniei left its monetary policy rate at 5.25 percent today, the highest in the European Union, the bank said in an e-mail. The decision matched all 20 estimates by economists surveyed by Bloomberg. It also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

“Once our indicators show that the inflationary expectations are diminishing, we will take the necessary measures and we will proceed with monetary-policy adjustments,” Governor Mugur Isarescu said at a briefing in Bucharest. “Our main instrument is of course the interest rate, but we are also insisting on liquidity control and on minimum reserves, where there are possible measures that could lead to a faster decline in borrowing costs for the real economy and the government.”

Romania, which halted a rate-cutting cycle in May, is bucking a regional trend toward lower borrowing costs with the inflation rate at more than double the central bank’s target for this year. A rescue plan that sought to impose losses on insured Cypriot deposits has rekindled Europe’s sovereign-debt crisis, sparking fears of contagion across the continent.

‘Dovish Tone’

“Isarescu took a more dovish tone, suggesting that rates could be cut once inflation starts to fall,” William Jackson, an emerging-markets economist at Capital Economics Ltd. in London, wrote in an e-mailed note. “We think inflation is likely to ease in Romania in the third quarter. The country’s high levels of foreign-exchange debt will limit the scope to ease policy unless financial-market sentiment improves.”

The leu, the world’s best-performing currency against the euro in January, pared this year’s advance to 0.8 percent after the Cyprus uncertainty triggered a 1.4 percent loss this month. It traded at 4.4175 per euro at 5:15 p.m. in Bucharest today, down 0.1 percent from yesterday’s close.

Isarescu said the impact of Cyprus’s bailout on the leu was “limited” and the country is not facing capital outflows. The central bank will “closely monitor” all capital inflows that may be coming from Cyprus due to Romania’s “high interest rate,” according to Isarescu.

Slowing Inflation

The inflation rate declined to 5.7 percent in February, after reaching 6 percent in January, the highest in 19 months. Price growth will return to the central bank’s target range of 1.5 percent to 3.5 percent by year-end, policy makers predict.

Isarescu said today the inflation rate will remain outside the bank’s targeted band in the “next months” and decline toward the upper limit by the end of the year.

The bank provided funding in line with demands from commercial lenders at its weekly repurchase operations for a fourth week on March 25 after limiting liquidity for five months to help boost the currency. The central bank lent 3.5 billion lei ($1 billion), more than the 247 million lei provided a week earlier.

Eastern European central banks are trimming borrowing costs to help revive flagging economic growth. Hungary cut its main interest to 5 percent on March 26, while Poland’s central bank reduced its seven-day reference rate on March 6 to 3.25 percent. The Czech central bank kept interest rates near zero for a third meeting today as policy makers debate whether to weaken the koruna to stimulate an economy mired in its longest recession since at least 1996.

“We are not in a situation to cut” rates, Isarescu said in a speech in Bucharest yesterday. “Even though we averted a recession, we still have inflationary expectations.”

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