Romanian Central Bank Leaves Interest Rates Unchanged

Romania's central bank today left its key interest rate unchanged, after cutting it four times in previous meetings. The decision was taken as a the effects of an extensive drought and a weaker leu threaten to add to pre-existing inflationary pressures.

The National Bank of Romania decided to leave its Monetary Policy Rate at 7 percent at a board meeting in Bucharest today. According to the press statement

"The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices and the evolution of the leu exchange rate, given the difficulty of assessing the duration and effects of the recent world financial market turbulences..

The analysis of recent trends in macroeconomic indicators reveals a slowdown of the disinflation process and of the economic growth mainly due to supply-side factors (the impact of a prolonged drought on the farming sector) but also attributable to persistent domestic demand pressures. These pressures are also highlighted by the widening external imbalance.

Year-on-year inflation climbed to 4.96 percent in August, close to the upper limit of this year's target band, due to a significant increase of food prices and a correction of the leu's exchange rate against the background of recent turbulences on the world financial markets.

Wage dynamics have accelerated well above productivity growth, emphasizing the risks of deteriorating external competitiveness and of labour cost-related inflationary pressures. "

A drought that damaged two-thirds of Romania's crops this year hus pushed up food prices and a weakening of the leu during this month is making imports more expensive. The government also plans to increase spending, moving an eight-month budget surplus earlier this year into a full-year deficit of 2 percent of gross domestic product.

Romania's annual inflation rate rose to 5 percent in August, reaching the upper limit of the central bank's year-end annual inflation target of 4 percent, plus or minus a percentage point.

A weaker leu since mid-August has helped raise the prices of goods and services indexed to the dollar or the euro, including rents, telephone bills and gasoline. The leu has continued it's decline in September, bringing its loss against the euro since Aug. 1 to 6.6 percent and its drop against the dollar to 3.5 percent.

The International Monetary Fund warned last week that Romania's widening current-account gap makes the economy and the currency more vulnerable to external issues such as international investors' reluctance to place money in emerging markets amid the U.S. subprime crisis.

The current-account deficit widened to a record 9 billion euros ($12.6 billion) in the first seven months of this year from 4.9 billion euros in the same period last year as imports rose because of the stronger leu and the scrapping of many trade barriers when Romania joined the EU.