Romania cuts rate ahead of market opening

BUCHAREST (Reuters) – Romania’s central bank slashed its key interest rate by two percentage points to 12.50 percent on Friday, bringing it closer to market levels ahead of granting foreigners access to leu currency deposits today. Analysts said the move indicates the bank is confident that the economy is strong enough to face the latest step in the capital account liberalization, which the IMF had feared would undermine efforts to bring down inflation. «It’s a signal that, for the moment, the economy is under control,» said Bucharest-based financial analyst Florian Libocor. The monetary policy rate gives an indication for the rates used to drain liquidity at open market auctions for one-month deposits. By allowing higher liquidity, the central bank has pushed market rates to around 8 percent. The International Monetary Fund has feared the liberalization would flood the ex-communist country with billions of euros in hot cash but analysts say market rates are now unattractive for speculators. Since the beginning of the year, the central bank has cut its key rate by a total of 400 basis points and analysts say Friday’s cut might be the last significant one before the fourth quarter, with the bank waiting to see if inflation continues to drop. «Assuming that inflation will be 7.0 or 7.5 percent in 2005 and nothing extremely bad will happen, the central bank will probably keep the monetary policy rate at around 12 percent,» said Libocor. The central bank (BNR) said in a statement that inflation, one of the highest in the region, was likely to continue falling and that reaching the 7.0 percent target for this year, down from 9.3 percent in 2004, was a priority. «The BNR board believes the continuation of disinflation is realistic, provided that a mixture of adequate economic policies is maintained,» the central bank said. In addition to cutting the monetary policy rate – used for draining deposits at its open market operations – the bank also cut its Lombard rate for collateralized loans to commercial banks to 20 percent from 25 percent.

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