July 4, 2019 / 10:46 AM / 17 days ago

UPDATE 2-Romanian central bank holds fire on interest rates

(Adds governor comment)

BUCHAREST, July 4 (Reuters) - Romania’s central bank kept its main interest rate unchanged on Thursday despite rising inflation, with central bank governor Mugur Isarescu saying the rate was high enough considering the recent firming of the leu currency.

He noted that the leu’s strengthening would amplify the country’s rising current account deficit.

The bank kept its benchmark rate at 2.5% despite inflation rising above expectations to 4.1% in May and being forecast to remain above the bank’s 1.5-3.5% target this year. Isarescu said inflation could fall below 4% in June.

The governor said interest rates were high enough to stand out from other central and eastern European states, attracting temporary capital inflows and amplifying the country’s external shortfall.

“The monetary policy rate is sufficiently high given the leu currency developments,” Isarescu told a briefing. “If we take the interest rate higher or much higher we risk attracting large capital inflows.”

“We have capital inflows, which means the rate differential is sufficiently attractive. We are especially concerned about the current account deficit, which is why we ... will not allow the leu currency to firm.”

Policymakers, who last hiked the main interest rate more than one year ago, have since tightened monetary policy by controlling money market liquidity, which they said would not choke economic growth.

Isarescu said the bank’s decision to not hike rates further last year was “inspired.”

Growth and inflation have crept higher in several eastern European economies, but analysts have said the easing bias in core markets has allowed its central banks to avoid rate hikes.

Romanian policymakers need to balance the need to rein in inflation and the firming of the leu currency should it raise interest rates. The bank has said a stronger leu would not help the country’s rising external shortfall.

“While high core inflation justifies a tight monetary policy, the possibility of seeing large portfolio capital inflows triggered by the interest rate differential will act as a deterrent to rate hikes,” Romania’s BCR said in a note.

The Romanian leu was up 0.1 percent against the euro at 1440 GMT. (Reporting by Luiza Ilie; Editing by Hugh Lawson)

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