BUCHAREST: Romania’s central bank cut its benchmark interest rate to a record low of 5 per cent on Monday, with slowing inflation giving the bank room to nurture a still fragile economy.
While Bucharest’s emerging European Union peers have lowered borrowing costs sharply, stubborn inflation had forced Romania’s central bank to keep rates on hold at the EU’s highest level.
But the bank now expects inflation to ease to 3.2 per cent by the end of the year, within its target band of 1.5-3.5 per cent, as it gradually falls from May’s 5.3 per cent.
Analysts polled by Reuters had expected the quarter per centage point cut and most see the bank cutting rates once more by the end of the third quarter before holding them there until at least the end of 2013.
One expressed some concern over the timing of the cut, after the US Federal Reserve’s recent signals that it will scale down the monetary stimulus that sent money flooding into emerging Europe, boosting Romania’s leu currency and prompting a debt rally.
“The US Federal Reserve signals complicate things. But as long as we need monetary policy easing, perhaps it is best we start before we run out of time,” said Vlad Muscalu, senior economist at ING Bank in Bucharest.
Central bank governor Mugur Isarescu had said after the last rate meeting in May that a cycle of rate cuts was on the cards. It was the first rate cut in more than a year.
“The cut was so clearly signalled at the last rate meeting that it does not come as a surprise,” Muscalu said.
The leu was up 0.3 per cent against the euro at 4.448, unchanged from levels before the cut.
Romania kicks off a round of European central bank meetings this week, with Poland setting rates on Wednesday, and the European Central Bank and the Bank of England both expected to hold rates steady at record lows on Thursday. The US Fed’s comments that it may begin withdrawing its stimulus have hit markets hard, particularly in emerging economies.
Romanian debt managers rejected all bids at two debt tenders in June for the first time in almost a year, while the leu has lost 3 per cent since the start of May.
The government concluded a 5 billion euro aid deal led by the International Monetary Fund last month, and while the government has indicated it wanted to secure a successor deal, negotiations could run long, prompting investor concerns.