(Bloomberg) -- Romania refrained from raising interest rates to tackle the European Union's fastest inflation as the central bank lines up with the looser global monetary-policy stance to prevent unwanted capital inflows into its currency.
The National Bank of Romania has left borrowing costs unchanged for more than a year, preferring instead to address above-target inflation by draining excess cash out of the financial system. Governor Mugur Isarescu, this week handed a new five-year term, said Thursday that the key rate is “high enough” amid appreciation pressure on the leu.
Earlier, the bank left the rate at 2.5%, in line with the predictions of all analysts surveyed by Bloomberg.
“Our ambition isn't to bring inflation back into the target band at any cost,” Isarescu said. “Maybe we'll be lucky and we'll have a good harvest and inflation will fall below 3.5% at year-end. But we won't pay the high cost of deepening the external gap even more.”
Other eastern European countries are also holding fire on interest rates, with the Czech Republic and Poland both leaving borrowing costs untouched in the past two weeks.
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Romania is concerned about speculative capital inflows that could ensue if rates are raised, adding unwanted volatility to its currency. Those concerns are trumping inflation, which has topped the 3.5% upper end of the central bank's tolerance band since February.
Isarescu reiterated this week to parliament that prices will be tamed by year-end, saying the central bank has all “weapons ready” to act should it need to. With euro-area interest rates way below Romania, the bank won't let the leu strengthen against the common currency, he said.
“The rate will be left unchanged this year,” said Eugen Sinca, a Bucharest-based economist at Erste Group Bank AG. “While high core inflation justifies 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.”
--With assistance from Harumi Ichikura.
To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net;Irina Vilcu in Bucharest at isavu@bloomberg.net
To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Michael Winfrey
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