UPDATE 1-Romania central bank bucks trend, cuts rates to record low

Tue Feb 4, 2014 8:07am EST

Related Topics

* Analysts expect rates at 3.5 pct through the year

* Governor Isarescu to explain decision at 1300 GMT (Adds analyst comment, details)

BUCHAREST Feb 4 (Reuters) - Romania's central bank cut its benchmark interest rate by a quarter point to a new record low of 3.5 percent on Tuesday, defying pressure on emerging market policymakers to bolster their currencies against turbulence.

Romania's move probably ends a rate-cutting cycle that has cut borrowing costs by 175 basis points since last July. The central bank had held back previously due to persistently high inflation.

"Today's decision was probably a close call," said William Jackson, an economist at Capital Economics, noting the need to shore up capital flows to support the leu currency.

Even so, he said, the decision "serves as a reminder that not all emerging markets have suffered heavily during the recent bout of market turmoil."

Romania's leu showed little reaction to the decision. It was up around 0.7 percent on the day at 1255 GMT.

India, Turkey and South Africa were among emerging economies who hiked rates abruptly last month to protect their currencies against the rout.

Romania has had scope to cut rates thanks to a bumper harvest in 2013 which helped push consumer prices to an all-time low of 1.6 percent in December, within the central bank's 1.5-3.5 percent target. That, coupled with weak lending, have underpinned monetary policy easing.

Inflation is set to quicken again in the second half of this year, by contrast with last year and a series of modest tax hikes take effect. And with both Romania's presidential election and elections in the European parliament due this year, analysts believe the cycle of rate cuts has ended.

"In our opinion this was the last interest rate cut," said Vlad Muscalu, senior economist at ING Bank in Bucharest. "This has become even more reasonable given the difficult international context."

The central bank left the minimum reserve requirements for commercial banks' liabilities unchanged on Tuesday, after it surprised markets last month by cutting them for both the leu and foreign currencies, releasing liquidity into the market.

Both Governor Mugur Isarescu and deputy Governor Cristian Popa have said minimum reserve requirements would gradually be lowered this year.

Governor Mugur Isarescu will explain the bank's decision in a news conference at 1300 GMT. (Reporting by Luiza Ilie; additional reporting by Sujata Rao and Natsuko Waki; editing by Matthias Williams)

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