Romanian Central Bank Cuts Key Interest Rate to 8%

By Irina Savu

Sept. 29 (Bloomberg) -- Romania’s central bank cut its main interest rate to the lowest level in 19 months as a deepening recession saps price pressures in the east European country.

The Banca Nationala a Romaniei lowered the monetary policy rate to 8 percent from 8.5 percent, the Bucharest-based bank said in an e-mail today. The decision matched the expectations of all 13 economists surveyed by Bloomberg. The rate remains the highest in the European Union after Hungary cut its rate to 7.5 percent yesterday.

Twenty of the 53 central banks tracked by Bloomberg eased monetary conditions in the past three months to fight the recession, including east European countries such as Russia and the Czech Republic in August and September. The cut comes two months before presidential elections on Nov. 22 that pit the two governing parties against each other and threatens to break up the governing coalition.

“The decision is as expected, so no real surprise at this stage,” Raffaella Tenconi, chief economist at Wood & Co. in Prague, said in an e-mail today. “Clearly the political situation is an important factor going forward and I expect a temporary pause of the monetary easing cycle for a few months now.”

International Bailout

The bank has lowered the rate five times since February as government austerity measures linked to the country’s international bailout made room for a monetary easing needed to soften the impact of a recession.

Romania’s economy contracted an annual 8.7 percent in the second quarter, the most on record, and inflation slowed to a two-year low in August as consumption dropped and the global crisis forced the government to seek an international bailout.

The central bank also left the minimum reserve requirements on foreign-currency commercial deposits at 30 percent and 15 percent on deposits in lei. The bank has cut the foreign currency rate from 40 percent and 18 percent on lei deposits so far this year.

“They were loosening requirements too fast, so generally I think this is welcome news,” Tenconi said. “I think it’s possible they will cut requirements further in November, but leave interest rates unchanged in order to support lending.”

Leu Strengthens

Romania’s leu was higher against the euro after the interest rate announcement, advancing as much as 0.3 percent to 4.1922 versus Europe’s common currency. The Bucharest Stock Exchange’s benchmark BET Index rose 0.6 percent to 4,418.81.

The bank, which will hold its next rate-setting meeting on Nov. 3, said it will “closely monitor domestic and global economic developments so that, by using its available instruments, to ensure the fulfillment of its objectives of achieving and maintaining price stability in the medium-term.”

Inflation slowed to a two-year low of 5 percent in August compared with 5.1 percent in July. The central bank forecasts the inflation rate will fall to 4.3 percent by the end of this year and 2.6 percent in 2010.

The government predicts the economy will shrink about 8.5 percent this year, after growing 7.1 percent last year, the fastest pace in the EU. It predicts an emergence from a recession in the fourth quarter and growth of about 0.5 percent next year.

Romania obtained a 20 billion-euro ($29 billion) international loan led by the International Monetary Fund and the EU this year to finance its budget and current-account gaps.

As a condition for receiving the credit, the government froze state wages this year and pledged to cut spending to meet a budget target of 7.3 percent of gross domestic product in 2009. Hungary, Ukraine, Belarus, Latvia and Serbia have also sought bailouts to prevent defaults and aid banks.

To contact the reporter on this story: Irina Savu in Bucharest isavu@bloomberg.net.