Romania's central bank left interest rates unchanged at a record low 6.25 pct as expected

D.Shistohilis- 01.04.2011

Romania's central bank left interest rates unchanged at a record low 6.25 percent as expected on Thursday and cut minimum reserve requirements to ease lending and boost the economy.

The central bank said the short-term inflation outlook showed heightened risks mainly due to factors outside its control like food, fuel and government-regulated prices and that it would vigilantly monitor domestic and global economic developments.

Analysts and dealers said the central bank was not likely to cut interest rates any time soon to give the recession-hit economy a shot in the arm, though they had expected a more hawkish tone and the leu eased as a result.

"The more notable thing is that the central bank ... has become increasingly hawkish on inflation concerns. The tone has shifted in recent communications," said Neil Shearing at Capital Economics.

Persistently high inflation due to energy and food costs has prompted several analysts to revise their forecasts and most now see rates remaining unchanged this year, versus previous expectations of cuts.

Romania's economy is still lagging its neighbours after a deep recession and the central bank is torn between cutting rates to kickstart recovery and raising to keep inflation under control and support the leu.

Among its peers in central Europe, Poland is expected to raise rates further next week after a rise in January and the Czech Republic is seen tightening policy later this year. Hungary left borrowing costs on hold on Monday. [ID:nLDE72R0H3]

LOWER RESERVE REQUIREMENTS

The Romanian bank has kept interest rates at a record low since May 2010. A rise in value added tax last July pushed inflation up and it surprised markets in February , quickening to an annual 7.6 percent from January's 7.0 percent due to higher global oil and food prices.

A recent rally in the leu, which has risen some 3 percent against the euro in 2011, will lessen the impact of high imported inflation and could give the central bank more leeway if the move is sustained. The currency fell 0.4 percent on the day, erasing some of those recent gains.

The central bank did however cut minimum reserve requirements on foreign currency liabilities to 20 percent, from the previous 25, a step which supports banks' liquidity and may help lending.

"A cut in the minimum reserve requirement is welcome. It will have a positive impact on hard currency-denominated loans and on interest rates in the banking system which could in turn help the economy," said Melania Hancila, chief economist at Volksbank in Bucharest.

All 14 analysts polled by Reuters saw the bank keeping rates flat at a record low of 6.25 percent in March and May. Only five see cuts ranging from 25 to 75 basis points by the end of the year while eight see rates remaining at current levels in 2011.

Source Reuters - Balkans.com.