Romania Will Probably Refrain From Key Rate Cuts, Isarescu Says

Romania probably won’t cut its benchmark interest rate further, preferring to stimulate the economy by trimming lenders’ reserve requirements, the central bank chief said.

As gross domestic product surges at the European Union’s fastest clip, policy makers don’t want to risk luring short-term investors by loosening policy further, Governor Mugur Isarescu told reporters Tuesday in Bucharest. Last month’s pickup in inflation will help limit a temporary decline in prices starting in the summer to 1 percent, he said.

“With the economy advancing by 4 percent, we have enough stimulus left in the minimum reserves,” Isarescu said. “We don’t want to attract speculative capital inflows and be flooded with money. That’s a problem.”

The central bank unexpectedly cut its key rate to a record low in May to help stave off deflation after the government lowered the sales tax on food. Consumer prices may decline for “several quarters,” according to Isarescu. Refraining from further reductions would end an easing cycle that wiped 1.5 percentage points from borrowing costs in 10 months.

The central bank should identify the right “timing and dosage” to lower lenders’ minimum reserve requirements, according to Isarescu. They should be cut to 2 percent from the current 8 percent for leu deposits and 14 percent for foreign-currency liabilities, he said.

Banks will get a further boost as the share of non-performing loans in their credit portfolios declines to less than 10 percent this year after “real progress” in cleaning up their balance sheets, Isarescu said.

The governor played down a more than 1 percent drop in the leu since anti-corruption prosecutors announced a probe into Prime Minister Victor Ponta this month. The currency has lost 0.3 percent this year against the euro, eastern Europe’s worst performance, data compiled by Bloomberg show.

“The leu’s decline is negligible,” Isarescu said. “The internal situation and the Greek tension prompted the fall.”

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