(Adds Isarescu comments, market reaction, detail)
By Luiza Ilie
BUCHAREST May 6 Romania's central bank left its
key interest rate at a record low of 3.50 percent on Tuesday and
forecast lower inflation in 2014, although it warned that
volatile capital flows in emerging markets might create risks
for its outlook.
Central bank Govenor Mugur Isarescu said the bank has
lowered its end-year inflation forecast to 3.3 percent from a
previous estimate of 3.5 percent. Its forecast for next year is
3.3 percent as well.
In March, the bank ended a rate-cutting cycle that has
lowered borrowing costs by 175 basis points. It began easing
last year, later than its emerging European peers, due to
persistently high inflation.
It eventually had scope to cut because of bumper cereal
crops, which cut inflation to an all-time low of 1.0 percent in
March, well below the bank's 1.5-3.5 percent target, and boosted
growth to one of European Union's highest levels.
"Almost all components of the new forecast are looking
slightly better," Isarescu told a news conference. "We were
especially positively surprised by the performance of food
The monetary authority has indicated it would ease policy
further by cutting minimum reserve requirements for commercial
banks. But it has held fire after a surprise first cut at the
start of the year, as tensions in Russia and Ukraine mounted.
On Tuesday, Isarescu said the bank was still looking to
lower minimum reserve requirements in "adequate" doses and at
the right time.
It said that risks associated with the inflation outlook
chiefly stem from external sources, "namely the variability of
investors' risk appetite over the short and medium term in
relation to emerging economies as a whole, amid the recent
geopolitical and regional tensions."
Isarescu played down the risks to the economy and markets
from neighbouring Ukraine in comments late on Monday. The
banking system's comfortable solvency and liquidity buffers
should help alleviate problems arising from the exposure of
Austrian and French banks to Russia and Ukraine, he said.
Ukraine's conflict with Russia, however, is keeping
investors cautious in neighbouring Central Europe as well.
Analysts said the central bank could still loosen policy
using indirect money-market moves that increase liquidity,
keeping intra-bank interest rates low.
"We do not see this meeting as lacking in action," said Vlad
Muscalu, chief economist at ING Bank in Bucharest. "We believe
the central bank will find ways to stimulate economic growth
further, even without using its more visible instruments."
The leu was down 0.1 percent against the euro at 1320 GMT,
trading at 4.4380. That was unchanged from levels before the
On Tuesday, central European assets were mostly range-bound
as investors weighed the risks to prices from the escalating
crisis in Ukraine against signs of economic recovery in the
(Writing by Radu Marinas; Editing by Larry King)