Romania Won’t Cut Rates as Political Turmoil Sinks Leu
Romania’s central bank will probably refrain from cutting its benchmark interest rate for a fifth consecutive meeting after the government collapsed for a second time this year, sending the leu to a record low, analysts from London to Bucharest said.
The Banca Nationala a Romaniei may keep its monetary policy rate unchanged at 5.25 percent at a meeting on May 2, according to economists from Bank of America Merrill Lynch, Capital Economics Ltd. and Banca Comerciala Romana SA. The median estimate of a Bloomberg survey of 17 economists was for a quarter-point cut before the Prime Minister Mihai-Razvan Ungureanu a no-confidence vote in parliament on April 27.
The turmoil triggered a sell-off in the country’s currency, which fell to an all-time low against the euro today and may force Romanian policy makers to shield the leu by keeping rates unchanged after lowering borrowing costs one percentage point to boost faltering economic growth.
“Given Romania’s heavy burden of foreign-exchange debt, the exchange rate is a critical factor in the National Bank’s decision process,” Neil Shearing, chief emerging-markets economist at Capital Economics in London, wrote in a note to clients on April 27. “It remains unclear as to how events will pan out over the next few days, but it seems unlikely that policy makers will cut rates with so much uncertainty about the political backdrop.”
The leu depreciated as much as 0.5 percent to a record low of 4.4140 per euro at 2:22 p.m. in Bucharest today, the biggest intra day slump since Feb. 20. The benchmark BET index slid as much as 0.4 percent to 5,311.00 today.
Governments are crumbling across the European Union as German Chancellor Angela Merkel pushes for austerity to prevent the euro area from breaking up and a debt crisis from spreading. The ouster of Ungureanu took place as the International Monetary Fund and the European Union were reviewing the country’s progress under a precautionary-loan accord.
President Traian Basescu moved to limit the turmoil after the no-confidence vote designating Victor Ponta, the head of the opposition Social Democrats, as Prime Minister, giving him 10 days to draw up his governing plan. Ponta said April 28 he will announce his proposed 20-member Cabinet on May 1 and may seek a vote of confidence in Parliament on May 7.
The government collapse “will put some pressure on the currency and we think the national bank will continue to make sure the currency remains reasonably stable,” said Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London. ‘It may delay the rate cut the consensus is expecting.’’
The Social Democrats and Liberals toppled Unugureanu’s government with 235 votes in favor of toppling the administration, four more than the 231 needed to oust the Cabinet in the 460-member legislature.
Ungureanu was unable to fend off defections in the former ruling coalition in his first no-confidence motion. His predecessor, Emil Boc, survived 10 such votes before he stepped down Feb. 6 to ease political and social pressure stemming from anti-austerity nationwide protests.
Romania, which secured a 5 billion-euro ($6.61 billion) precautionary loan from the IMF and the EU in 2011 to protect it from the debt crisis, is trying to reassure investors it will keep fiscal discipline and cut the budget deficit to 1.9 percent of gross domestic product this year after 4.4 percent in 2011. It hasn’t drawn any funds so far.
To contact the reporter on this story: Irina Savu in Bucharest at firstname.lastname@example.org
To contact the editor responsible for this story: James M. Gomez at email@example.com