Romanian Central Bank Holds Main Rate as Uncertainties Grow

  • Decision matches forecasts of 14 of 15 economists in survey
  • Deflation deepend to record 3% in March on sales-tax cuts

Romania kept borrowing costs unchanged for an eighth meeting as the central bank bemoaned complications at home and abroad to predicting the path for inflation and setting monetary policy.

The benchmark interest rate was left at a record-low 1.75 percent, according to an e-mailed statement Thursday. That matches the forecasts of 14 of 15 economists in a Bloomberg survey, with one seeing an increase to 2 percent. The bank kept reserve requirements for foreign-currency and leu deposits unchanged.

“With uncertainties on the rise, it’s getting very hard to make forecasts and similarly hard to make decisions,” Governor Mugur Isarescu told reporters in Bucharest. “But I wouldn’t say we’re in wait-and-see mode because we’re vigilantly looking at developments and are ready to use all instruments at hand to counter the risks that are arising.’’

Rate setters in the European Union’s second-poorest country have said their next move will be to tighten monetary policy, predicting the first bout of deflation since communism will soon reverse. Isarescu, already wary of potential turbulence from local and national elections this year, is concerned about possible capital inflows as the European Central Bank loosens monetary policy.

Market expectations for more ECB easing by its September meeting will probably delay Romania’s first policy action to November, according to Ciprian Dascalu, a Bucharest-based economist at ING Bank Romania SA.

Currency Strength

The leu is this year’s sixth-best performer among 24 emerging-market currencies tracked by Bloomberg, gaining 0.5 percent. It’s outperformed currencies of regional peers with lower benchmark borrowing costs, such as Poland.

Isarescu said in a Feb. 24 interview that the central bank would probably tighten policy sooner than previously envisaged, starting with a narrowing of the interest-rate corridor it uses for liquidity management. He softened his stance after the bank’s March meeting as new legislation allowing struggling homeowners to hand back mortgaged properties to lenders added to the risks to financial stability.

Consumer prices declined a record 3 percent from a year earlier in March after further reductions in the value-added tax. With the economy growing at one of the EU’s fastest paces and the government ramping up spending before the elections, the central bank sees price growth reaching 3.4 percent by end-2017, near the upper limit of its target band. The bank will present its quarterly inflation report on May 10.

Monetary-policy makers now see price declines extending into July, a month longer than their previous forecast, Isarescu said Thursday.

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