Romania Keeps Record-Low Rates, Eases Reserve Requirements

  • Decision matches forecasts of all 19 economists in survey
  • Central bank trims minimum FX reserve requirements to 10%

Romania’s central bank kept borrowing costs unchanged for an 11th meeting and eased lenders’ minimum reserves requirements as it looks beyond the longest bout of deflation since communism and begins discussing how to address the nation’s surging economy.

The benchmark interest rate was left at a record-low 1.75 percent, matching the forecasts of all 19 economists in a Bloomberg survey. The bank trimmed reserve requirements for foreign-currency deposits to 10 percent from 12 percent, leaving the leu equivalent at 8 percent. Governor Mugur Isarescu flagged the move in a Bloomberg interview in July, saying he was “looking for opportunities” to bring the requirements closer to European Union levels.

“The timing to turn counter-cyclical hasn’t arrived yet,” Isarescu said Friday, stressing that the country’s demand surplus must be thoroughly evaluated before any action is taken. “It’s drawing near but our most-recent data indicate only the presence of a positive output gap.”

Monetary policy in the European Union’s second-poorest nation has been pulled in opposite directions, resulting in the longest period of unchanged rates in five years. Second-quarter gross domestic product jumped 6 percent from a year earlier, while consumer prices fell for a 15th month in August. Romania’s technocratic government, in power since a graft scandal sank the last prime minister, will step aside after a parliamentary vote set for Dec. 11.

Leu Strength

With benchmark interest rates below 1 percent in some eastern European nations, Romania’s leu has gained 1.6 percent against the euro this year. That’s the region’s third-best performance after Russia’s ruble and Hungary’s forint, data compiled by Bloomberg shows.

Deflation, considered by Isarescu to be the temporary result of pre-election tax cuts, eased in August to an annual 0.2 percent. The Banca Nationala a Romaniei sees the inflation rate at minus 0.4 percent at year-end, before rebounding in 2017 to reach 2 percent. It targets price growth of 2.5 percent plus or minus one percentage point.

The decision to lower reserve requirements may be aimed at freeing up banks’ cash before a potential local bond issue denominated in euros, according to Ciprian Dascalu, a Bucharest-based economist at ING Bank Romania SA.

“The reserve cut is neutral from the perspective of monetary conditions as new loan origination is almost entirely in lei,” he said by e-mail, estimating the move will release about 500 million euros ($561 million) to lenders.

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