Romania cuts key interest rate to 20 percent; further cuts needed

BUCHAREST – Romania’s central bank (BNR) cut its key interest rate by 75 basis points yesterday, moving ahead with a gradual monetary easing to reflect slowing inflation. Analysts said a fresh cut might come as early as next month. The EU candidate’s central bank lowered its deposit rate to an annual 20 percent from 20.75 percent. This followed last month’s 50-basis-point cut, the first adjustment of the rate this year. The reduction was anticipated by officials and the market. But its size was bigger than the median estimate in the latest Reuters poll, which forecast a cut to 20.25 percent in August. The rate, used to drain money market liquidity, was hiked three times last year to ease inflationary pressure as booming imports ballooned the Balkan country’s current account deficit to 5.8 percent of GDP, worrying international lenders. «The board of the central bank, assessing the recent evolution of macroeconomic indicators, decided to cut, starting with July 12, the intervention rate by 0.75 percentage points,» the BNR said in a statement. Romania’s inflation, one of the highest in the region, eased to a year-on-year 12 percent in June from 12.3 in May, and is officially targeted at 9.0 percent in December. More cuts needed The rate cut sent short-term money market rates lower to 17-19 percent from last Friday’s 18-20 percent. But it put no pressure on the leu currency as constant hard currency inflows helped it firm to 40,800/35 to the euro from Friday’s 40,880/10. Analysts said the rate cut reflected BNR’s confidence that disinflation was on track and its expectations that the current account deficit would improve in the second half of the year due to a better year for agriculture. «Romania has overperformed on inflation in the first semester and a higher farming output will help to trim the trade deficit,» independent analyst Florin Petria said. Latest data showed a 1.56-billion-euro deficit in January-May trade, the main component of the current account, versus 1.2 billion in the 2003 period. Analysts said yesterday’s cut would push T-bill yields to below 17 percent for one-year paper from 17.24 last week. But they said more cuts were needed to temper indirect inflows of hot money lured by hefty returns on state securities. «In real terms, the rate is high, offering portfolio investors quite nice returns of around 10 percent,» said ING Barings Romania analyst Dan Baciu. «We expect a fresh 50-basis-point cut as early as next month.» Analysts said keeping high rates for too long might fuel speculation of a worsening inflation outlook, and that rate cuts were also justified by Romania’s aim to allow foreigners to hold leu deposits as soon as March 2005. «We see room for further cuts, totaling around 400 basis points this year, given the inflation outlook,» Simon Quijano-Evans, an analysts with HVB Group said. Commercial banks were also expected to react more quickly to the latest BNR signal by tightening their spreads and reducing borrowing costs, which currently hover around 23 percent.