NBR keeps rate at 8%, cites political uncertainties

The policymaking group of National Bank of Romania left its benchmark interest rate at 8% and required reserve ratio for leu liabilities at 15% and for fx liabilities at 30% in the last rate-setting session of the year. The central bank's decision to keep key rate on hold came as a surprise to analysts who expected a 25basis point cut in today's session. They also predicted a reduction in reserve requirements. In Tuesday's rate-setting session, the central bank has also set the annual inflation target for 2011 at 3.0 percent with +/-percentage point tolerance band. The inflation target is to be discussed with the government.

The annual inflation rate fell to 4.94% in September, the lowest level since July 2007, but which remains high compared to other European Union countries. The new target announced by NBR is important for meeting the objectives assumed for joining the euro area in January 2015, which involves the reduction of the inflation rate close to euro area average. Economists say the assumed target is extremely ambitious as the excises and administrated prices will lead to an increase in inflation rate.

According to Reuters, Romania's central bank unexpectedly kept its main interest rate unchanged at 8 percent on Tuesday, taking a cautious stance amidst a government crisis and recent turbulence on emerging markets. Rate easing and an International Monetary Fund-led bailout have been the two main tools policymakers have used to stave off crisis this year. Analysts had said the collapse in October of the minority government and political deadlock over a new cabinet ahead of a Nov. 22 first round of a hotly contested presidential election posed the risk that a third IMF aid tranche would be delayed.

They also said it could potentially cause the central bank to pause on rates, although a vast majority polled last month had expected a cut of up to half a percentage point. Romania has the highest interest rates in the European Union. Hungary, which like Romania also took a big IMF-led rescue package last year, now has rates at 7 percent.
Analysts comments: OTILIA CIOTAU, PIRAEUS BANK, BUCHAREST :'(Monetary) easing will definitely resume in 2010.' 'The bank's decision was probably influenced on one side by the latest developments on the FX market -- with more depreciation pressures gathering at the horizon and on the other, by the gap between the key rate and the market rates, currently at higher levels.'

'At this point, a cut of 25 or 50 basis points would have no impact on the quoted rates.'
LARS CHRISTENSEN, DANSKE BANK, COPENHAGEN :'To us this decision is no major surprise given the significant political uncertainties in Romania and the renewed selling pressures on the leu.'

'In fact, despite a very weak economy, the central bank might be forced to hike its key policy rate if the region currency sell-off continues and/or the political uncertainties do not ease soon.' 'We think this was the only possibility the central bank had. If rates had been cut the leu would just have come under further pressure.' 'That said, we do not think the decision to keep the key policy rate unchanged will be enough to ease the pressure on the leu given the political uncertainties and the negative region environment at the moment.'

CRISTIAN MLADIN, BCR IN BUCHAREST :'The central bank has become more prudent, given the recent announcement that excise duties for tobacco will be hiked in advance in November and December and that weakening pressure on the exchange rate remain high, on the back of ongoing political tensions.' '(The 2011 inflation target) is not impossible to reach.'
NICOLAIE ALEXANDRU-CHIDESCIUC, ING ( ING - news - people ) BANK IN BUCHAREST: 'The main reason for the decision seems to be the political risk and ... implicitly, risk of currency depreciation.' 'It is possible that the market impact is that of a rise in interbank interest rates.'

'This means that lending interest rates will not fall and ... the impact will be to slow down economic recovery.' 'A target of 3 percent for 2011 seems very unlikely to be met. I think it is much too optimistic. Other than a slightly stronger leu I see no other factor that could help lower inflation to that level.'

IONUT DUMITRU, RAIFFEISEN BANK IN BUCHAREST :'It is a prudent decision, they were more prudent than expected, justified mainly by political turmoil.' The 3 percent target for 2011 seems achievable at this point.'