Romanian Political Turmoil Thwarted Policy Easing, Isarescu Says

  • Central bank governor say rate-cutting cycle hasn't ended
  • 2015 CPI forecast cut to -0.7%, next year's lifted to 1.1%

Political turmoil sparked by the government’s resignation prevented Romania’s central bank from easing monetary conditions at this month’s rate-setting meeting, Governor Mugur Isarescu said.

While policy makers abandoned a plan to lower the amount banks must hold against deposits on Nov. 5, they may still continue next year with easing including interest-rate reductions, according to Isarescu. The bank also trimmed its forecast for this year’s inflation, with price growth to remain negative until next May, he told reporters Monday in Bucharest.

“We’d planned to cut at least the minimum reserve requirements at last week’s meeting,” Isarescu said. “Future monetary policy decisions will be marked by uncertainties but I can’t say the end of the rate-cutting cycle is here.”

Romania’s largest street protests since the 1989 anti-communist revolution prompted the exit of Prime Minister Victor Ponta last week and President Klaus Iohannis struggling to resolve the tension. The central bank left its benchmark interest rate at 1.75 percent, saying the process of picking a new cabinet "fuels uncertainty around the macroeconomic policy mix."

While the leu has weakened 0.6 percent against the euro since the demonstrations began, Isarescu said the currency was extremely stable. It was little changed at 4.4605 against the euro at 1:46 p.m. in Bucharest and has advanced 0.5 percent this year, data compiled by Bloomberg show.

Consumer prices will decline 0.7 percent this year, according to the central bank, more than the previous forecast for a 0.3 percent drop. It sees 2016 inflation of 1.1 percent compared with 0.7 percent earlier.

Deflation is being caused almost entirely by government tax cuts, according to Isarescu. Price growth won’t return to the bank’s target band of 1.5 percent to 3.5 percent until the start of 2017, he said. Policy makers won’t meet again on interest rates until 2016.

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