Romania Keeps Main Rate Unchanged After Government Resigns

  • Decision matches estimate of 20 economists in Bloomberg survey
  • Central bank has kept rates on hold for four meetings

Romania’s central bank kept its main interest rate unchanged for a fourth meeting, saying this week’s government resignation and protests demanding early elections complicated its decision and stoke uncertainties around monetary policy.

The bank left its benchmark at 1.75 percent, according to an e-mailed statement Thursday, matching the predictions of all 20 economists in a Bloomberg survey. Governor Mugur Isarescu, already grappling with deflation that he predicted will persist for three quarters, said the bank has the tools to combat any political fallout.

The central bank is weighing its next policy move in the wake of Wednesday’s sudden exit of Premier Victor Ponta and his government, as well as tax cuts that turned consumer prices negative for the first time since communism. Political upheaval in the European Union’s second-poorest nation risks harming asset prices and delaying policy making, with next year’s budget still not finalized.

‘More Difficult’

"The general context rendered the adoption of a monetary-policy decision more difficult," Isarescu told reporters in Bucharest. "Domestically, the process to appoint a new cabinet fuels uncertainty around the macroeconomic policy mix, especially as the drafting of the 2016 budget is still pending."

The leu weakened 0.3 percent against the euro Wednesday as demonstrations over corruption following a deadly nightclub fire triggered Ponta’s resignation. The currency was 0.1 percent lower at 4:56 p.m. in Bucharest, leaving it up 0.6 percent this year, data compiled by Bloomberg showed.

While political instability has increased, Isarescu said Romania’s economy remains stable. Gross domestic product grew 3.4 percent from a year earlier in the second quarter after 4.3 percent expansion in the first as reductions in the value-added tax boosted retail spending. Lowering the levy has also curbed prices, with deflation stretching into a fourth month in September on an annual basis.

Isarescu’s “more cautious” tone in light of the government’s exit hasn’t changed the outlook for interest rates significantly, according to William Jackson, an analyst at Capital Economics Ltd. in London.

“Low inflation will allow the bank to keep the policy rate at its current historic low for the next 9-12 months,” he said in an e-mailed note. “Rate hikes could come onto the cards in 2016 if, assuming it remains in place, the VAT cut scheduled for the start of next year leads to a boom in consumer spending. This is something the Council has voiced concerns about before.”

The central bank maintained banks’ reserve requirements for leu deposits at 8 percent and kept those for foreign-currency liabilities at 14 percent. It also approved its quarterly inflation report, which Isarescu will present Nov. 9.

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