Romania Starts Rate Cuts as Isarescu See CPI Drop

Romania signaled more monetary easing on slowing inflation after it cut the European Union’s second-highest benchmark interest rate for the first time in more than a year.

The Banca Nationala a Romaniei lowered its main rate by a quarter point to a record-low 5 percent, it said in an e-mailed statement today. The outlook for consumer prices allows for “gradual” monetary-policy easing, Governor Mugur Isarescu told reporters after the announcement.

“Our policy decisions are tied to our calculations over the inflation trend as we are convinced that the rate will be significantly lower in the next few months,” Isarescu said in Bucharest. “We’re indeed keeping our eyes wide open when assessing external developments.”

Policy makers, who had held rates since March 2012, are joining central banks across eastern Europe in seeking to bolster economic growth even as signs of a pullback in U.S. monetary stimulus dent asset prices. Isarescu signaled in May that he’d deliver several cuts this year as inflation will slow to within the bank’s target in the second half.

Rates may fall 25 basis points or 50 basis points further in a “short-lived easing cycle,” Abbas Ameli-Renani, an economist at Royal Bank of Scotland Group Plc in London and Tatiana Orlova, his colleague in Moscow, said in an e-mail today. A basis point is 0.01 percentage point.

‘Wary’ Bank

“The central bank will be wary of aggressive monetary easing, fearful of discouraging inflows, especially in an environment in which portfolio inflows are already likely to be constrained by Fed tapering and in which regional peers will also have most likely brought their easing cycles to an end,” the RBS economists wrote.

Consumer prices rose 5.3 percent from a year earlier in May, growing at the same pace as in April, National Statistics Institute data show. Price growth will return to the central bank’s 1.5 percent to 3.5 percent target range by year-end, policy makers predict.

The leu maintained gains after the rate announcement, adding 0.4 percent to 4.4488 against the euro by 6:19 p.m. in Bucharest. It has weakened 0.7 percent in the past three months, the fourth-best performance among 24 emerging-market currencies tracked by Bloomberg.

Recent leu volatility was sparked by a bond rally earlier this year, Isarescu said, adding that currency swings of 5 percent were “normal.”

The benchmark BET stock index gained 0.4 percent to 5,281.51. The yield on the government’s dollar bonds maturing in 2023 fell 10 basis points to 5.01 percent.

‘Closely Monitors’

“The National Bank of Romania closely monitors domestic and global economic developments via the gradual adjustment of the monetary policy conduct and the adequate use of its instruments so as to achieve price stability over the medium term and financial stability,” the regulator said in the statement.

Romania halted a rate-cutting cycle more than a year ago as a drought stoked food prices and utility bills rose following a pledge to the International Monetary Fund to free energy prices. Its main rate is second only to Croatia’s within the EU after the Adriatic nation became the trading bloc’s 28th member today.

The country should reach a new financing agreement with the Washington-based lender to help the government keep borrowing costs low and to push forward with “delayed structural reforms,” Isarescu said. The EU may not be part of a new accord, he said.

Reserve Requirements

The central bank left its minimum reserve requirements on foreign-exchange deposits at 20 percent and kept the ratio for leu deposits at 15 percent, according to the statement.

Romania joined Poland and Hungary in lowering borrowing costs to boost growth. Poland cut its benchmark to a record 2.75 percent on June 5 as the economy grapples with its worst slowdown in four years and is expected to reduce it further to 2.50 at its next meeting on July 3. Hungary reduced its main rate to a record 4.25 percent on June 25 in an 11th straight quarter-point cut.

Romanian gross domestic product advanced 2.2 percent from a year earlier in the first quarter, accelerating from a 1.1 percent pace in the previous three months. GDP growth this year may exceed the government’s 1.6 percent forecast because of a a better harvest, Isarescu said in May.

“Today’s cut in Romanian interest rates is likely to be followed by further policy easing over the coming months,” William Jackson, an analyst at Capital Economics Ltd., said by e-mail. “However, the scope for aggressive loosening is limited by the country’s high level of foreign-currency debt.”

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