(Adds debt tender, analyst comment)
* Central bank sees inflation picking up later this year
* Volatile capital flows an upside risk
* But investors may like Romanian rates
* Debt managers reject all bids at debt tender
(Adds details, quotes)
By Luiza Ilie
BUCHAREST, Feb 6 Romania's central bank raised
its inflation forecast for this year on Thursday and said the
economy faced risks from volatile emerging market capital flows,
although it said those risks could go both ways.
Like other emerging markets, Romanian assets have been hit
since late January by jitters about an unwinding of U.S.
stimulus. However, eastern Europe has been somewhat insulated
due to relatively good fundamentals and close links with a
recovering euro zone.
Romania's central bank even cut interest rates on Tuesday,
while some other emerging economies like Turkey and South Africa
have had to raise rates to protect their currencies.
Central bank Governor Mugur Isarescu said on Thursday that
while the turmoil in emerging markets posed risks, Romania
offered relatively attractive interest rates and could also
benefit if investors shifting money out of economies like Turkey
and Ukraine - where political as well as economic problems have
made investors nervous - chose to park money in Romania.
"It is the first time where we say external risks could go
both ways," Isarescu told a news conference to present the
quarterly inflation report.
"We are a conservative central bank and we say the risk is
rather that inflation will go up. But ... we are in the middle
of potential crises, two of which have already been triggered in
Ukraine and Turkey and we cannot rule out that while moving
money here and there investors will discover interest rates in
Romania are relatively good."
The bank revised this year's annual inflation expectation to
3.5 percent, the top end of its target range, from 3 percent and
issued a 2015 forecast of 3.2 percent.
On Tuesday it cut its benchmark interest rate by a quarter
point to a new record low of 3.5 percent.
The leu currency has been under pressure, however,
and Isarescu said the bank had sold hard currency on behalf of
the Finance Ministry last week. That helped boost the leu after
a 2 percent slide against the euro since the start of this year.
COMFORTABLE FINANCING POSITION
Romania's finance ministry rejected all bids on Thursday at
a tender to sell treasury bonds with a residual maturity of 7
years, having already postponed a tender for short-term paper at
the start of the week - probably because yield demands were too
high although it did not say.
Isarescu said that debt managers now had plenty of leu funds
at their disposal. The ministry is in a comfortable financing
position. It has pre-financed some of its needs in the second
half of 2013, tapped foreign markets in January and has a
funding buffer that would cover five months.
"Funding conditions have deteriorated because of the
emerging markets sell-off and tighter local liquidity and ... I
wouldn't be surprised if it happened again but they have a very
large buffer," said Mihai Patrulescu of Unicredit Tiriac Bank.
Annual inflation reached a record low of 1.6 percent on the
year in December, and is expected to fall below 1 percent in the
first months of 2014 before picking up again in the second half.
"Inflationary expectations will stay within target. That's
the biggest gain ... in the battle against inflation, that
households and companies are getting used to low, European-level
inflation rates in Romania," Isarescu said.
Both Isarescu and Deputy Governor Cristian Popa have said
the bank's 3.5 percent interest rate left Romania
"well-positioned" for some time to come, while suggesting
monetary policy could be further eased by gradually lowering
minimum reserve requirements for lenders' liabilities.
(Editing by Susan Fenton)