Romania’s central bank ready to increase rates to fight inflation

BUCHAREST – Romania’s central bank (BNR) is ready if need be to tighten interest rates to achieve single digit inflation and help cut the country’s bulging current account gap, BNR Vice Governor Cristian Popa said yesterday. The current account deficit of the EU aspirant, which aims to slash inflation to 9.0 percent this year, soared to 5.8 percent of GDP last year from 3.4 percent in 2002, worrying the country’s main economic mentor, the International Monetary Fund. «We believe the current stance is adequate and we stand ready to further tighten policies should additional inflationary pressure arises,» Popa told Reuters in an interview. The IMF has urged Romania to slow a rapid rise in real wages and private lending and to cut energy sector losses, all contributing to the country’s widening external deficit. To offset expectations, inflation would rise higher than predicted and reduce the speed of current account deficit expansion, the BNR hiked the rate on deposits it drains from the local market three times in 2003 and has maintained it flat at an annual 21.25 percent so far this year. It also postponed non-resident access to free operations in leu currency deposits – part of moves to free up capital flows by 2007 when Romania hopes to join the European Union – to prevent the entry of speculative funds attracted by higher rates. Popa said a «moderate reduction» of the current account gap this year was now a main topic of discussion with an IMF mission visiting Bucharest to clinch a new deal. Romania managed to complete an IMF deal for the first time in 14 post-communist years in 2003. Popa gave no figure but Romanian officials had said Bucharest was ready to negotiate a deficit of 5.5 percent of GDP, although the IMF wants it lower at 5.2 percent. «The deficit will be sustainable from the point of view of its magnitude and of its financing, with both set to improve on 2003,» said Popa, without elaborating. He said last year’s boom of imports was driven not only by consumer goods or food items but also by a 21.7 percent rise of machinery acquisitions as net foreign direct investments grew. He also noted a rise in portfolio inflows to some $500 million. «I believe (EU) convergence play will provide the necessary impetus for both types of investments in the future,» he added. Popa said inflation was still falling, with January’s year-on-year inflation at 13.9 percent versus last December’s 14.1 percent. This year’s goal is to cut it to 9 percent. «We have to see disinflation progressing and effects on the external balance before we can think of relaxing the interest rate stance. We need to see results before can decide on changes.» He said the central bank can help the current account only as part of broader economic policies. «The first concern of the central bank is, and must remain, disinflation,» he said. «Disinflation will go further but prudence should be maintained especially in the context of 2004 (an election year).»

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