Romania cuts key policy rate

The Banca Nationala a Romaniei slashed its key policy rate from 8 per cent to 7.5 per cent, adding to a total of 225bps in monetary easing last year.

Explaining its decision, the bank cited a “persistently severe economic contraction”, “softening tensions in the domestic political field” as well as a “relative improvement of foreign investors’ perception regarding the Romanian economy”.

The move comes less than a month after Romania’s parliament approved a new government, whose chief priority will be to pass a budget that will convince the International Monetary Fund to restore financial assistance.

The Romanian economy is expected to have contracted by up to 7.5 per cent last year, a slumpt that forced the east-European country to approach the IMF in March for help.

Although modest growth of 1.3 per cent is forecast this year, domestic politicians are concerned that banks are not passing on lower rates to businesses, which could stifle an economic recovery.

Economists said a rate cut of this size might help lower the gap between the monetary and bank lending rates.

Analysts were expecting the central bank to hold the monetary rate at 8 per cent amid lingering concerns about inflation.

However, Romania’s currency, the leu, appreciated slightly against the euro after the news, indicating investors remain attracted by Romanian interest rates that are much higher than in the eurozone.

Ionut Dumitru, chief economist at Raiffeisen Bank in Bucharest, said the rate cut reflected expectations that the inflation rate would recede below 4 per cent in the coming months, from 4.7 per cent currently, as well as an “improvement in the political situation”.

Traian Basescu was last month re-elected as president after abitterly fought presidential campaign and parliament subsequently voted to approve a new government led by Emil Boc.

Mr Boc had been forced to serve in a caretaker role since October when his government was toppled, forcing the IMF to suspend its €20bn programme.

Members of parliament are due to debate an austerity budget on January 11 that could pave the way for the IMF to restore assistance in February.

“From a political point of view, I would say the risk is now much lower,” Mr Dumitru said.

 

Source:  www.ft.com (05/01/2010)