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Romanian central bank probably will leave key rate unchanged

Romania's central bank will probably leave the benchmark interest rate unchanged at 8.75% today to keep a lid on inflation as European Union membership boosts wages and investments, a survey of economists shows.

The monetary policy rate will stay at the highest level in a year, according to seven of 11 economists surveyed by Bloomberg. Three predict a cut to 8.25% and one expects a reduction to 8.5%. A decision will be issued this afternoon. The central bank seeks to reduce the inflation rate to about 4% by the end of this year from 4.9% in December. Government plans for a wider budget deficit of 2.8% of gross domestic product this year to pay for infrastructure investments may lift inflation from a near-record low of 4.9% in December.
„The inflation outlook is far from being clear and therefore it would be hard for the central bank to justify a rate cut at this stage,” Radu Craciun, head of research at ABN Amro Romania, wrote in an e-mail on February 8. Central bank Deputy Governor Cristian Popa said on January 16 that wage growth in Romania, which joined the EU on January 1, is „one of the major risks” for inflation and said interest rates are „appropriately positioned.” Average net wages in Romania rose 17.3% in the year through November 2006 to 908 lei (€200) a month. The government has predicted similar growth this year.

Economists who forecast a lower rate point to strong gains in the lei and slower inflation in the past year. December inflation was just off a 16-year low of 4.7% in November and at the lower end of the central bank's target, giving it room to cut rates, economists said. A reduction could also slow gains in the lei, which rose 16% against the dollar and 6.3% against the euro in the past year, more than all currencies except the Slovak koruna and Paraguay's guarani.
December's inflation rate compares with an average of 2.1% in the EU. Romania's National Statistics Institute is expected to release January inflation data on February 12. „We expect a rate cut of at least 50 basis points and there is a risk of a more aggressive cut,” Florin Citu, chief economist at ING Bank Romania, said in an e-mail on February 8. He cited „better than expected inflation, continuing lei appreciation, lower oil and commodity prices and no effects as of yet on consumer prices from higher wages and credit growth.”

Any change to the rate in the meeting would be the first since June, when the central bank raised it a quarter percentage point. It raised the rate a full point a year ago to help slow inflation from 8.5%. The central bank uses its monetary policy rate as a benchmark to drain excess cash from commercial banks through weekly auctions of one-month deposits and monthly auctions of three-month certificates of deposit to keep lending in check.
„By lowering the interest rate to 8.25% on February 9, the central bank could send the market a much stronger signal regarding its discomfort with exchange-rate appreciation,” Ionut Dumitru, head of research at Raiffeisen Bank, wrote in an e-mail on February 5.
Corina Negut, a senior trader at Piraeus Bank Romania, predicted the central bank will lower minimum foreign exchange reserve requirements for banks to 35% from 40%, in addition to cutting the rate to 8.5%. Florian Libocor, an economist at BRD Bank - Groupe Societe Generale, said the central bank may lower minimum lei-reserve requirements to 15% from 20%, and cut the rate to 8.25%. (Bloomberg)