The Romanian central bank cut its inflation forecasts for this year and next on Thursday, as the economy showed signs of contracting fast due to global turmoil, but said room for new interest rate cuts was limited.
Lower inflation expectations, at 4.4% for December and 2.8% for the end of 2010, come in the wake of a 50 basis point interest rate cut by the bank on Wednesday in an effort to revive lending and bolster the battered economy.
Markets had seen the larger-than-expected cut as aggressive but the central bank moved to dampen expectations of deep reductions in borrowing costs in the future. “There is room for monetary policy relaxation but it is not very big. It must remain prudent,” central bank Governor Mugur Isarescu told a news conference to present a quarterly inflation report.
Like most of its neighbors, Romania fell into contraction this year as demand evaporated, lending came to a virtual standstill and foreign investors fled local markets amid global financial turmoil.
But it was reluctant so far to cut borrowing costs substantially because of concerns over currency stability and inflationary pressures after regional economies such as Poland and Hungary saw their markets sink after policy easing.
The bank said on Thursday it was less concerned about the leu currency (RON) after Romania secured a €20 billion aid package from the International Monetary Fund and other institutions in March, which opened the way for monetary easing.
Hungary slashed rates by 200 basis points after winning a $25.1 billion IMF-led rescue loan that initially helped stabilize its assets following October's meltdown on global markets.
But Isarescu said there was “no chance” for similar easing, even though he thought “speculative” pressures on the leu had already peaked. This, analysts said, pointed to gradual rate cuts in coming months.
“The bottom line is the situation improved considerably following the IMF program,” said Simon Quijano-Evans, emerging markets economist at Chevreux in Vienna. “This will help the leu ... and that allows the central bank to cut rates more meaningfully.”
The leu rose some three quarters of a percent against the euro on Thursday, to trade at a three-week peak of 4.1220 . Dealers said gains were driven largely by regional moves and the first tranche of IMF aid which arrived this week. (Reuters)