* Keeps rates at record low 5.25 percent
* Balances inflation, weak currency with slow economy
* Domestic demand, euro zone to keep economy under pressure
By Luiza Ilie
BUCHAREST, Jan 7 Romania's central bank held
interest rates unchanged at a record low on Monday, seeking to
balance above-target inflation and a still weak currency with an
economy on the brink of recession.
While neighbours such as Poland, the Czech Republic and
Hungary have cut rates to help their economies, Romania -- the
European Union's second-poorest member and relying on an
International Monetary Fund deal -- has had to keep a premium to
maintain investor interest.
The benchmark interest rate remained at 5.25
percent, as had been forecast by all 13 analysts in a Reuters
The central bank halted a rate cutting cycle in May 2012 due
to persistently high inflation -- which was an annual 4.6
percent in November, versus a 2-4 percent target -- and a series
of government changes that sent the leu currency to a record
Governor Mugur Isarescu said the central bank expected
annual inflation to slow to within a new and lower 1.5-3.5
percent target band sent by the bank by the end of 2013 but the
economy would continue to struggle.
"The feeble dynamics of industrial production and retail
trade, as well as the protracted euro area recession entailing
adverse effects on Romanian exports, suggest the persistence of
the negative output gap," Isarescu told reporters.
Since May, the central bank has left rates unchanged but
introduced market liquidity controls to tighten policy, and the
leu has regained some ground since the leftist government
secured a new mandate in a Dec. 9 election.
The leu traded about 0.2 percent firmer against the euro
from Friday's close.
Romania's economy suffered after the global economic crash
ended a credit boom in 2009 and it had to take drastic measures
under an IMF deal, raising taxes and cutting spending to put the
country on a more even footing.
But that deepened recession and the economy is barely
recovering and on the edge of another contraction having shrunk
0.5 percent in the third quarter of 2012 compared with the prior
After his election win, Prime Minister Victor Ponta has a
mandate to conclude a new deal with the IMF to replace a 5
billion euro agreement expiring in March, an important
reassurance to foreign investors that Romania will keep tight
The prospect of a new deal has helped bring down borrowing
costs, which have fallen nearly 50 basis points on three year
But the currency remains within about 5 percent of its
record low against the euro and the threat of more political
instability -- with Ponta having to work with his rival,
President Traian Basescu -- limit the central bank's room to
"The next move may well be a cut, but inflation has to drop
closer to the target before the NBR can begin cutting," said
Barclays Capital economist Daniel Hewitt.