April 4, 2018 / 10:30 AM / 3 months ago

UPDATE 2-Romania central bank unexpectedly holds interest rates

(Adds governor comment, details)

By Luiza Ilie

BUCHAREST, April 4 (Reuters) - Romania’s central bank held its benchmark interest rate at 2.25 percent on Wednesday, and Governor Mugur Isarescu said two rate hikes delivered earlier this year have yet to fully take effect.

Nine of ten analysts polled by Reuters had expected the bank to hike interest rates by a quarter point, as a consumption-driven surge in prices pushed inflation to 4.7 percent in February, significantly above the bank’s 1.5-3.5 percent target.

“We make policy decisions based on facts and data,” Isarescu told reporters. “Some of the effects of our previous hikes have yet to be seen.”

“A good treatment isn’t just giving some medicine, but also determining the dose,” he added. “We must see how markets react,...the European context and how inflation develops.”

He said current excess market liquidity may have delayed the transmission of the previous hikes.

The bank has raised rates by an overall 50 basis points so far this year, its first hikes in a decade. The median forecast of a Reuters poll put the benchmark at 3 percent at end-2018.

Isarescu said the bank estimated inflation would peak at around 5 percent before it falls back to the upper target range.

The Romanian leu was flat to the euro at 1300 GMT.

Isarescu said while Wednesday’s decision could put softening pressure on the leu, the rate differential was favourable for the currency.

In late March, Isarescu said policymakers were caught between those who argued rate tightening was too slow and those who thought it will choke economic growth, adding the government’s fiscal loosening needed to be curbed.

The bank has said it expected inflation to exceed its target range in the first part of 2018, as the statistical base effect of a 2017 value-added tax cut fades, before falling back to within target by year-end.

New inflation forecasts will be released in May.

Analysts at BCR, who correctly predicted the bank would hold its main interest rate, said in a preview note that from an inflation and demand perspective further hikes were “completely justified”.

“But we see stronger chances of a hike at the May policy meeting,” they added. “Overall we maintain the view that the key rate will reach 2.75 percent at end-2018.”

Romania is the second of the EU’s central and eastern members to have started tightening from record low levels, after the Czech central bank. (Editing by Alexandra Hudson)

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