Romania Cuts Key Rate to Record Low, Lowers Reserve Ratios

Romania cut its benchmark interest rate to a record low for a fifth meeting after inflation slowed to its lowest rate in almost two years, and policy makers also trimmed banks’ reserve requirements to spur growth.

The Bucharest-based Banca Nationala a Romaniei lowered the rate to 3.75 percent from 4 percent, according to an e-mailed statement today, matching the estimate of 13 of 14 economists in a Bloomberg survey. One predicted borrowing costs would be left unchanged. The bank cut minimum reserve requirements for leu liabilities to 12 percent from 15 percent and for foreign-currency ones to 18 percent from 20 percent.

“We still have ammunition -- if you look at our peer countries, the reserves are very high, and even the key rate is high in comparison,” central bank Governor Mugur Isarescu said. “We will closely monitor the effects of today’s decision and we will react afterward.”

Central bankers, who have lowered the benchmark rate by 1.5 percentage points since July 2013, are seeking to spur leu-denominated lending and fuel growth. The central bank said in November there is “some room” for more cuts after the inflation rate fell to 1.8 percent, the lowest since May 2012.

“We expect the central bank to also cut policy rates by 25 basis points in February before ending its easing cycle,” Abbas Ameli-Renani, a strategist at Royal Bank of Scotland Group Plc. in London, said in a message. The reserve cut “should encourage increased lending activity in leu, which is important for the economy.”

Resistant Leu

The leu, last year’s second-best performer against the euro among 24 emerging-market currencies tracked by Bloomberg, was little changed at 4.500 per euro at 5:50 p.m. in Bucharest.

Isarescu said he saw no prospect of the leu depreciating after the cut in reserve requirements. Moves of as much as 5 percent in the currency represent a “equilibrium area” and are “normal,” he said.

“The exchange rate should normally depreciate, but I’m afraid that’s not going to happen,” Isarescu said. “I don’t see any imminent danger of a significant depreciation.”

The economy grew 4.1 percent in the third quarter, the fastest in two years, helped by export growth and a bumper harvest. Lending lagged, falling to 220 billion lei ($66 billion) in November, down 4.1 percent from a year earlier and 0.6 percent from October, according to central bank data.

FX Burden

The central bank is targeting 2014 price growth of 1.5 percent to 3.5 percent and sees year-end inflation at 3 percent, after a drop to about 1 percent in the first quarter. The statistics institute will publish December inflation data Jan. 13, according to a calendar on its website.

“The country’s heavy foreign exchange debt burden and large external financing requirement limit the scope for further easing,” William Jackson, an emerging-markets economist at Capital Economics Ltd. in London, wrote in an e-mailed note. “But given that inflation is below target, and set to remain so this year, and that domestic demand remains sluggish, we expect at least one more 25 basis points rate cut this year.”

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