Romania Holds Rates as Brexit Prompts ‘Pragmatic’ Approach

  • Decision matches forecasts of all 14 economists surveyed
  • Deflation to persist longer than planned, central banker says

Romania kept borrowing costs unchanged for a ninth meeting as the U.K.’s vote to leave the European Union compounded uncertainties over deflation and prompted the central bank to adopt what it called a “pragmatic” approach.

The benchmark interest rate was left at a record-low 1.75 percent, according to an e-mailed statement Thursday. That matched the forecasts of all 14 economists in a Bloomberg survey. The bank reiterated its readiness to counter potential volatility.

“The dominant factor is uncertainty, which was heightened by the U.K. vote,” Governor Mugur Isarescu told reporters at the bank’s headquarters in Bucharest. “As a consequence, our approach is becoming more pragmatic. We’ll see how things develop and we’ll act with the arsenal of tools available.”

The EU’s second-poorest nation is being forced to reassess its outlook for interest rates in the wake of the shock British referendum result. Having earlier said their next move would be to tighten policy via the interest-rate corridor, rate setters must now factor in greater market turbulence globally, alongside deepening deflation at home.

The leu has gained 0.3 percent against the euro since the Brexit result was announced in the early hours of Friday morning. It’s little changed this year, outperforming currencies of regional peers with lower borrowing costs, such as Poland and Hungary.

‘By Itself’

The central bank, which uses a managed float to steer the leu, hasn’t needed to intervene in the market as it “stabilized by itself,” according to Isarescu.

Romania’s first bout of deflation since the collapse of communism worsened in May, reaching 3.5 percent from a year earlier, a fifth month of price declines.

Consumer prices may rise 0.6 percent to 0.8 percent in the second half of 2016, central bank board member Daniel Daianu said June 14. Driven by economic growth of about 4 percent, inflation will accelerate to “close to 2.5 percent” next year, within the bank’s 1.5 percent to 3.5 percent target, he said.

Low import prices mean deflation will persist for longer than planned, Isarescu said Thursday. Even so, economic growth remains at more than 4 percent on an annual basis, and a return to consumer-price growth could raise the issue of rate increases.

Monetary tightening is still likely, according to William Jackson, an economist at Capital Economics Ltd. in London.

“But in light of Brexit concerns, it now seems that this will be more gradual than we had previously anticipated,” he said in a note.

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