Romania Warns of Summer Deflation Threat After Surprise Rate Cut

Updated on

Romania’s central bank warned of a temporary summer dip into deflation after it unexpectedly cut the benchmark interest rate to a record low.

Consumer-price growth will probably remain at about zero from June through mid-2016, bank Governor Mugur Isarescu told reporters Wednesday in Bucharest. Policy makers earlier trimmed their main rate to 1.75 percent from 2 percent, surprising all but four economists in a Bloomberg survey. They also lowered reserve requirements for banks’ leu deposits to spur lending.

Eastern European central banks have cut rates to all-time lows as falling oil prices and economic weakness in the euro area stoke deflation pressure. Romania has lowered borrowing costs by 1.5 percentage points in the past 10 months as inflation slowed to a record and the government sought to boost economic growth by cutting the value-added tax.

“We think this reduction is the final one of the current rate-cutting cycle,” Garanti Bank Romania SA economists Mihaela Neagu and Rozalia Pal said by e-mail. “Despite the rate cut, the positive real rate environment will be preserved, given the subdued inflation pressures. If we look at regional peers, we were above the key rates in the region.”

Poland held its benchmark at a record 1.5 percent Wednesday, while the Czech central bank is set to leave its 0.05 percent rate unchanged on Thursday.

Leu Retreats

Romania’s leu, which has gained 0.8 percent to the euro in 2015, weakened 0.3 percent to 4.4448 at 4:57 p.m. in Bucharest, data compiled by Bloomberg showed. The yield on euro-denominated debt due 2024 rose seven basis points to 2.23 percent.

“The move is likely to be at least short-term negative for the leu, particularly in a context where the cut in reserves releases a hefty bulk of leu liquidity,” Societe Generale SA strategist Roxana Hulea said by e-mail from London.

The central bank lowered reserve requirements for leu deposits to 8 percent from 10 percent, keeping those for foreign-currency liabilities at 14 percent. That will free up about 3 billion lei ($766 million) for lenders, Isarescu said.

“The new element in our decision is external uncertainties, with European real rates close to zero or negative so we have a lot to be concerned about,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE