UPDATE 3-Tumbling food prices prompt Romanian rate cut, offer scope for more

Mon Aug 4, 2014 11:16am EDT

Related Topics

* May be another 25 bps cut as early as Sept. 30

* Inflation to hover below target midpoint until mid-2015

* Romania recorded capital inflows from Ukraine crisis

* Black Sea state eyes unusually large cereal crops (Edits)

By Radu Marinas

BUCHAREST, Aug 4 (Reuters) - Romania's central bank cut its benchmark interest rate to a record low of 3.25 percent on Monday and hinted it could cut further as food prices tumble.

The bank began cutting rates last year, later than its emerging European peers due to stubborn inflation. But with harvests likely to prove exceptional, inflation hit a record low 0.7 percent in June and investors began to see scope for more easing.

Romania, which targets annual inflation of 1.5-3.5 percent this year and next, is forecast to play a pivotal role on the international grains export market in the 2014/15 season.

The central bank said it revised down annual inflation forecasts for this year and 2015 to 2.2 percent and 3 percent, from a previous 3.3 percent for both years.

"The outlook for the annual inflation rate (is set) to run at markedly lower readings than previously forecasted, i.e. below the midpoint ... until mid-2015."

Governor Mugur Isarescu told reporters inflation might allow more easing but further decisions would need to take greater account of the external environment.

International investors are anticipating moves by major central banks, notably the U.S. Federal Reserve, to start letting interest rates edge up again after years of keeping them unusually low.

"There may be further (easing) space but, this time, we'd be forced to take decisions taking into account the external environment to a greater extent," Isarescu said.

But such factors could include capital flows into Romania that some in the market attribute to investors moving money in from Russia - strengthening the leu - as sanctions over separatist violence in Ukraine start to bite.

"Starting February-March towards July there have been quite important capital inflows," Isarescu said.

A ONE-OFF CUT?

Until recently, the market had expected rates to stay flat at 3.50 percent.

But "inflation has fallen much faster than expected; we revised our inflation forecast downward to 2.3 percent from 3 percent for the year-end," said Ionut Dumitru, chief economist at Raiffeisen Bank in Bucharest.

The central bank saw inflation risks stemming chiefly from external sources, largely the risk of more volatile capital flows in Romania if investors develop greater risk aversion to emerging economies.

Capital Economics said that "with inflation likely to rise over the coming months, we think today's move was probably a one-off rather than the start of a fresh easing cycle."

Two local analysts said fresh easing was possible.

"The biggest surprise from today's meeting was the revision of the inflation forecasts. This coupled with the downward revision of average inflation in 2015 suggests more rate cuts are likely," said Mihai Patrulescu of UniCredit Tiriac Bank.

Raiffeisen's Dumitru said he now expects the bank to deliver another 25 basis point rate cut at its next meeting on Sept. 30.

The leu was only marginally easier at 4.4329 against the euro after the central bank moves. (Editing by Ruth Pitchford)

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