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Romanian central bank cuts benchmark rate cut to 8%

Romania's central bank unexpectedly cut the benchmark interest rate by three quarters of a percentage point to 8% after inflation slowed and the lei strengthened before the country joined the European Union.

The National Bank of Romania's decision surprised all 11 economists in a Bloomberg survey. Seven predicted no change, three forecast a cut of half a point and one a quarter-point reduction. The cut represents „quite a risky approach,” said Simon Quijano-Evans, a strategist at Bank Austria Creditanstalt in Vienna, by telephone. „The fiscal outlook doesn't seem to be supportive and we'll have EU-induced price increases later and the widening current-account deficit represents a challenge.”
The December annual inflation rate of 4.9% was just off a 16-year low of 4.7% in November and at the lower end of the central bank's target. The cut may slow gains in the lei, which rose 16% against the dollar and 6.3% against the euro in the past year, more than any currency except the Slovak koruna and Paraguay's guarani. „Developments in foreign exchange and money markets over the recent months have highlighted liquidity and interest rate levels triggering a faster appreciation of the domestic currency, which contributes significantly to a slowdown in aggregate price growth,” the central bank said in an e-mailed statement.

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. The government plans a wider budget deficit of 2.8% of GDP this year to pay for infrastructure investments. The 2006 trade deficit, the main component of the current-account gap, widened last year to €14.9 billion ($19.4 billion) from a deficit of €10.3 billion in 2005.
The Bucharest-based 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. The rate change was the first since June, when the central bank raised it a quarter point. It raised it a full point a year ago to help slow inflation from 8.5%. (Bloomberg)