Romania seen cutting rates as GDP slows, CPI steady

Romania's central bank is expected to cut interest rates for the first time in 19 months on Wednesday to protect the strained economy, with analysts nearly halving their 2009 growth forecasts over the last month.

Storm clouds have begun gathering over Romania in recent weeks, even though it largely escaped economic pain last year, as major companies such as ArcelorMittal and Renault's carmaker Dacia announce repeated work stoppages.

Most analysts revised their economic growth forecasts after November's industrial output data, which dropped by an unexpected 11.5 percent on the year, signalled the effects of shrinking euro zone demand could be more harmful in Romania.

Ten out of 17 surveyed analysts expect the central bank to cut interest rates, now at the highest level in the European Union, to ease the cost of borrowing as external sources of cash dry up for local businesses and consumers.

Many said inflationary risks stemming from a weak currency were now overshadowed by declining growth.

"Although substantial leu depreciation fuels inflation and inflationary expectations, we believe the central bank is not likely to ignore the deterioration in economic activity," said ING's Nicolaie Alexandru-Chidesciuc, who forecast a 25 basis points cut to 10 percent this month.

Other countries in eastern Europe already began cutting interest rates last year as growth figures started declining sharply.

Like many of them, Romania faces the burden of a frail currency that lost 20 percent against the euro in the last three months, but it also has the additional burden of bloated current account and fiscal deficits.

Prices are seen growing 6.3 percent on the year in January, at the same pace as in the previous month, as the weak leu offsets the benefits of cheaper fuel.

But analysts expect inflation worries to fade, helped by falling demand stemming from rapidly slowing lending growth, while concerns over economic growth will begin to prevail.
The economic expansion is expected to slow to just over 5 percent in the fourth quarter, from 9.1 percent in the third, bringing last year's growth to 7.8 percent.

But this year's outlook appears more gloomy, as growth is forecast at a modest 1.7 percent, compared to 3 percent in a similar Reuters survey last month.

Moreover, 2009 forecasts vary from -3.5 percent to 4.1 percent, underlying deepening uncertainty over Romania's ability to fight the cash shortage.

"The prospects for the real economy remain gloomy as some of the most important industrial plants ... have already closed temporarily, resulting in a further industrial production drop and export volume fall," said Rozalia Pal, head of macroeconomic research at UniCredit Tiriac Bank.

Pal sees economic growth at 0.6 percent in 2009. She is one of 10 analysts who see interest rates flat at 10.25 percent this month.

guardian.co.uk