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Romania's central bank keeps benchmark rate unchanged

Romania's central bank refrained from cutting interest rates as European Union membership on January 1 raises concerns consumer prices may rise.

The National Bank of Romania left the monetary policy rate unchanged at 8.75% for a fourth meeting in a row, it said in an e-mailed note yesterday. The Bucharest-based bank last increased borrowing costs by a quarter of a percentage point on June 27. Inflation in November, at 4.8%, was higher than economists expected and may prompt the central bank to put off any reductions until the middle of 2007. Investment in the Balkan country ahead of EU entry is expected to boost economic growth above 8% this year, the fastest pace since the end of 2004.
„The Romanian central bank today became a forward looking central bank. It's not looking at what inflation was anymore, but at what inflation may be,” Florin Citu, ING Bank Romania's chief economist, said in a telephone interview today. „It will start lowering the rate in the H2 of 2007 and it will reach 8% by the end of the year.” The central bank, which targets an inflation rate of 5% plus or minus a percentage point this year, must control consumer-price growth as the country prepares to join the EU on January 1 and adopt the euro as early as 2012.

„The short-term prospects are of a continuation of the disinflation process,” the central bank said in an e-mailed statement yesterday. „Consolidation of annual inflation under 5% - an important part of integrating into the European Union - still needs sustained economic and financial efforts for a longer period.” Romania, which at the beginning of this year had the highest inflation rate among EU candidates including Croatia, Bulgaria and Turkey, has seen annual consumer prices fall each month since May to levels that are higher only than those in Croatia. Central bank Deputy Governor Eugen Dijmarescu said on December 15 that the annual inflation rate this year will likely slow to as low as 4.7% from 8.6% in 2005. Inflation slowed to a 17-year-low in November.

The central bank uses its monetary policy rate as a benchmark to drain excess cash from commercial banks in Romania through weekly auctions of one-month deposits and monthly auctions of three-month certificates of deposit to keep lending and consumer prices in check. The central bank has requirements for banks' minimum reserves of 20% on lei-denominated liabilities and 40% for foreign-currency ones, which are also used as a means to keep lending and price increases in check.
The International Monetary Fund has said the government should seek a balanced state budget next year, instead of a planned deficit of 2.8% of GDP and keep its current-account gap in check or face an inflation rate of as high as 7% in 2007. The central bank has slowed inflation this year even as retail sales soared an annual 24.7% in October. The increase in sales, excluding cars, motorcycles and engine fuels, was led by a 32% gain in the sales of food, alcohol and tobacco, the National Statistics Institute said November 10. Non-food sales rose 19%. (Bloomberg)