Romanian Central Bank Keeps Rates Steady as Inflation Slows

Romania’s central bank kept its benchmark interest rate unchanged at the first meeting of the year as it weighs inflationary pressures against a slowdown in economic growth.

The Bucharest-based Banca Nationala a Romaniei held the monetary-policy rate at a record-low 5.25 percent, the second-highest in the European Union after Hungary, it said in an e-mail today. The decision matched the estimates of all 13 economists surveyed by Bloomberg. It also left its minimum reserve requirements on foreign-exchange deposits at 20 percent and the ratio for leu deposits at 15 percent.

The bank halted its easing cycle in May after two government changes and a power struggle between President Traian Basescu and Prime Minister Victor Ponta pushed the leu to a record low and a prolonged drought pushed food prices up. Ponta’s coalition won a two-thirds majority in Parliament in Dec. 9 elections and he was reinstated as premier last month.

“Monetary policy remains prudent, seeking to anchor inflation expectations and pave the way for the inflation rate to be close to the medium-term target,” Governor Mugur Isarescu told a press briefing. “The inflation rate may return to the target band by year-end, but risks and uncertainties over developments in the external environment, capital flows, administered prices and some volatile prices still persist.”

Leu Gains

The leu, which gained 1.5 percent in December, rose 0.1 percent to 4.4155 per euro by 4:13 p.m. in Bucharest. Yield on Romania’s 2016 euro-denominated bonds was unchanged at 3.07 percent, according to data compiled by Bloomberg.

Central banks in the region, including Hungary and the Czech Republic, are cutting rates or considering other measures, including currency interventions, to boost their economies. Hungary cut its main interest rate on Dec. 18 for a fifth month to 5.75 percent and may consider further easing depending on favorable market conditions.

While the Balkan nation’s inflation slowed to 4.56 percent in November, it will probably stay above the central bank’s targeted band of between 2 percent and 4 percent for 2012 as policy makers estimated the rate at 5.1 percent in December. The National Statistics Institute will release December inflation data Jan. 11. The bank targets inflation between 1.5 percent and 3.5 percent in 2013.

Tightrope Walking

The bank “continues to walk a tightrope between the need to bring inflation inside the target and sluggish economic growth, which calls for lower rates,” Banca Comerciala Romana SA economist Eugen Sinca said. “We think inflationary concerns will prevail and a new easing cycle will begin only after the emergence of clear signs of lower inflation pressures.”

Gross domestic product contracted a seasonally adjusted 0.5 percent in the third quarter from the previous three months, following a 0.1 percent gain in the April-June period, according to revised data from the statistics office.

Romanian policy makers lowered rates 1 percentage point before pausing on May 2. The country, which has a two-year 5 billion-euro ($6.5 billion) precautionary loan agreement with the International Monetary Fund and the EU, is considering a new deal with the lenders once the current one expires at the end of March.

A deal with the IMF and the European Union may be reached in the first half of the year, with talks on a new agreement starting this month, Isarescu said.

The central bank, which holds its next rate-setting meeting Feb. 5, said it will seek “to ensure an adequate liquidity management” in the financial industry. The bank has been limiting liquidity to commercial bank at weekly repurchase operations since October to prop up the leu.

“It’s important to note the change of tone regarding the bank’s liquidity management stance” as “there’s a likelihood that liquidity conditions will be less stringent than in previous months,” UniCredit Tiriac Bank SA senior economist Mihai Patrulescu said.

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