Romania Maintains Key Rate With Inflation Set to Pickup

  • Decision matches predictions of all 16 economists in survey
  • Price declines deepened last month after more sales-tax cuts

Romania kept borrowing costs unchanged for a seventh meeting as the central bank signaled it’s looking for ways to tackle an expected pickup in inflation amid uncertainty stemming from monetary easing elsewhere in Europe.

The benchmark interest rate was left at a record-low 1.75 percent, according to an e-mailed statement Thursday, matching the predictions of all 16 economists in a Bloomberg survey. Governor Mugur Isarescu reiterated plans to narrow the interest-rate corridor used for liquidity management, though he didn’t reaffirm that increases in the benchmark would follow.

Rate setters in the European Union’s second-poorest country are breaking ranks with their regional peers and the European Central Bank, shunning looser monetary policy even as consumer prices remain mired in the first bout of deflation since communism. Romanian policy makers see inflation reaching 3.4 percent by the end of next year, near the upper limit of their target range.

“The main reason we see the central bank diverging from regional central banks is the much elevated inflation profile versus the other countries,” Ciprian Dascalu, a Bucharest-based economist at ING Bank Romania SA, said in a note before the decision. “Tightening too late might entail significant risks to domestic macro-stability but upcoming elections might make some board members more reluctant to act pre-emptively.”

Stronger Leu

Romania’s divergent policy has helped make the leu the fourth-best performer of 2016 against the euro among 24 emerging-market currencies tracked by Bloomberg. It was little changed at 4:27 p.m. in Bucharest, leaving this year’s gain at 1.2 percent.

Isarescu, long concerned over the prospect of increased inflows of volatile capital into Romania, said he wouldn’t necessarily call narrowing the rate corridor monetary tightening.

The step “would increase deposit rates but would also cut the central bank’s lending rate for commercial banks,” he told reporters Thursday in Bucharest. “We don’t want to enter a dispute on whether this means tightening. We want to have a debate on this and find a new name for our stance.”

While Romanian consumer prices slumped 2.7 percent from a year earlier in February after further reductions in the value-added tax, the economy is growing at one of the continent’s fastest paces. That, along with the risk of higher public spending before elections this year, bolsters the argument against rate cuts.

Isarescu’s comments Thursday “reinforced our view that concerns about loose fiscal policy will prompt a move towards tighter monetary conditions,” William Jackson, senior emerging-markets analyst at Capital Economics Ltd. in London, said in an e-mailed note. “This might happen as soon as the next meeting in May.”

Before it's here, it's on the Bloomberg Terminal.