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Romania Lowers Main Rate With CPI at Post-Communist Low

Feb. 4 (Bloomberg) -- Romania cut its benchmark interest rate to a record low as inflation slowed to a post-communist record, with the central bank signaling the easing cycle may have ended.

The Banca Nationala a Romaniei reduced the rate to 3.5 percent from 3.75 percent, according to an e-mailed statement today, matching the estimates of 12 of 18 economists in a Bloomberg survey. Six predicted no change.

“We are now well positioned so that we won’t have to move the rate up and down,” Central Bank Governor Mugur Isarescu said in Bucharest today. “If we have volatile capital flows, we prefer to be less orthodox and allow more volatility in the market. We want to have the key rate as a benchmark focused on inflation.”

Romanian policy makers have been cutting rates since July to reverse a lending contraction and boost economic growth. They may not be able to lower borrowing costs further as inflation is poised to pick up and the U.S. Federal Reserve curbs stimulus, which roiled emerging-market assets, according to Bank of America Merrill Lynch and Capital Economics Ltd.

“Governor Isarescu hinted that the rate-cutting cycle may now have come to an end,” William Jackson, an emerging-markets economist at Capital Economics in London, wrote in an e-mailed note today. “Policy makers seem to have become concerned that they can’t lower the benchmark rate further without risking a selloff in the currency.”

Regional Trend

The leu bucked a regional trend of declining currencies, gaining 1.7 percent in the past week. The central bank probably sold more than 1 billion euros ($1.4 billion) to prop up the currency, according to estimates by UniCredit Tiriac Bank SA.

The Romanian currency strengthened 0.5 percent to 4.4679 per euro at 6:36 p.m. in Bucharest, the highest since Dec. 30, according to data compiled by Bloomberg. The bank operates a managed float of the leu and never comments on market intervention.

“We don’t aim to move the exchange rate, on the contrary, we want to sell what we have to sell and absorb the excess liquidity so that money market rates come close to the key rate and stay there,” Isarescu said. “We don’t target a specific leu level. We are waiting for the right moment to sell so that we don’t move the exchange rate too much.”

Policy makers left minimum reserve requirements at 12 percent for leu liabilities and 18 percent for foreign-currency liabilities, according to today’s statement.

‘Cuts Unlikely’

Last month, the central bank cut reserve requirements for both leu and foreign-exchange liabilities, releasing about 4 billion lei ($1.2 billion) and 500 million euros to commercial lenders.

“Further rate cuts are unlikely as the output gap already closed,” Vadim Khramov, a London-based economist at Bank of America Merrill Lynch, said by e-mail before the decision. “A bumper harvest pushed food prices down, but this effect will fade out by the end of the second quarter.”

Lending fell to 218.5 billion lei in December, down 3.3 percent from a year earlier and 0.6 percent lower than in November, according to central bank data. The economy grew 4.1 percent from a year earlier in the third quarter, the fastest in two years.

The central bank is targeting 2014 price growth of 1.5 percent to 3.5 percent and sees year-end inflation at 3 percent, after a drop to about 1 percent in the first quarter. The statistics institute is due to publish January inflation data Feb. 12.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@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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