Romania set to lower key rate despite growing trade deficit

BUCHAREST (Reuters) – Romania’s central bank is set to lower its key rate in line with slowing inflation, but analysts expect only moderate cuts because the trade deficit is widening, a Reuters poll showed yesterday. The ex-communist country, which wants to join the European Union in 2007, has promised the International Monetary Fund that it would cut its external deficit to 5.5 percent of GDP this year from 5.7 percent last year. Under a new standby deal with the IMF, Romania also aims to slash inflation, one of the highest in the region, to 9.0 percent this year from 14.1 in 2003. The median estimate of 12 analysts polled put the central bank’s (BNR) deposit rate at 19.5 percent in August versus 20 at present, and forecast 50 basis point monthly cuts on average by end-2004. The analysts saw a wider 2004 trade deficit, the key figure in the current account, with the median estimate at 4.5 billion euros versus 4.2 billion in the previous poll. «The market expects a cautious relaxation which will give the BNR enough room to counter any pressures and defend the inflation goal in the coming months,» said ABN Amro senior analyst Radu Craciun. On Monday, Finance Minister Mihai Tanasescu said he expected a fresh interest rate cut, saying July inflation was expected to be below June’s rate of 0.6 percent. July CPI numbers are due next week. Banking sources said the central bank might decide this week on a rate cut of around 75 basis points. BNR officials declined to comment. A BNR board meeting is due today. The BNR has lowered the rate used to drain money market liquidity by 125 basis points since June. That rate was increased thrice in 2003 to ease inflationary pressure as the current account gap surged, worrying the IMF. The poll put July’s inflation median estimate at 0.7 percent, above Tanasescu’s expectations, due to higher prices for utilities. But year-on-year inflation – which ran at 12 percent in June – is forecast to ease to 9.1 percent. Analysts also said growing foreign exchange reserves might temper concerns about the current account but the 2004 deficit target would remain difficult to achieve and needs cautious monetary and fiscal policies. «A bigger cut (than 50 basis points) might generate pressures because there are signs of a possible overheating,» BRD-SocGen analyst Florian Libocor said, pointing to recent statements from officials that the GDP growth could reach a hefty 7 percent. The latest data showed foreign exchange reserves, excluding some 105 tons of gold, surged by 852.5 million euros to 8.6 billion euros in July, or the equivalent of some 4.3 months of imports. The six-month trade deficit climbed to 2.04 billion euros from 1.55 billion euros in the same period last year, as imports surged 22 percent against export growth of 20 percent. Romania’s GDP rose by 6.1 percent in the first quarter, boosted by domestic demand.

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