Romania Extends Rate Pause as EU’s Fastest Inflation Weakens

(Bloomberg) --

Romania prolonged more than a year of steady interest rates, looking past the European Union's fastest inflation as the world's major economies pivot toward looser monetary policy.

Following the first cut in U.S. borrowing costs since the financial crisis, the National Bank of Romania left its benchmark rate unchanged at 2.5% on Monday, as predicted by economists in a Bloomberg survey.

Concerned about attracting speculative capital inflows, the central bank is battling elevated consumer-price growth by pulling excess cash out of the financial system rather than hiking borrowing costs. The strategy is paying off -- inflation eased for the first time this year in June. But it's still above-target.

“Inflationary expectations remain elevated mainly because of the uncertainties around fiscal policy and the oil price,” Governor Mugur Isarescu told reporters in Bucharest. “If I were to define our policy stance, it's not wait and see, it's rather ready to act.”

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Despite resurgent inflation, eastern European nations have been reluctant to lift borrowing costs, citing expectations for a slowdown in global economic growth. The Czech Republic kept interest rates unchanged last week, as did Poland in July.

The external environment is “preventing a potential hike in the policy rate,” said Eugen Sinca, a Bucharest-based economist at Erste Group Bank AG.

At 3.8%, Romanian inflation has pushed beyond the 1.5%-to-3.5% tolerance band, driven by a booming economy. As well as its money-market measures, the central bank is counting on a good harvest helping to ease produce costs.

Isarescu will present an updated inflation forecast later this week.

“We're witnessing striking stability in the exchange rate, which may be a good sign,” he said. “But we're not complacent -- we're vigilant, because this stability may be deceiving.”

--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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