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Analysts: BNR may not reduce key interest rate in 2011

The National bank of Romania may not reduce the monetary policy interest rate this year, as most analysts expected, because of inflation and of he fact, unique in Central Europe, that the leu did not take advantage of the developing of the emerging market, a Reuters analysis shows.

Most analysis interviewed by Reuters last month anticipated that BNR would reduce the key interest rate this year, at the same time with the attenuation of the impact of VAT increase on prices and due to the fact that Romania is preparing to conclude a preventive accord with IMF, according to Mediafax.

The accord marks the progress made by Romania and should reduce worries about the evolution of the leu, which has influenced the BNR decision to maintain the interest rate at high level, beginning with the month of May. Economic growth is still low, the budget is under pressure, while the economy is confronted with the increase of oil prices and with reforms in the local energy market which will lead to price rises. For that reason, prospects of the leu appreciation or of slowing down inflation are low, according to Reuters.

The 7% inflation in January, the highest id EU, exceeded expectations but some analysts are considering modifying estimates, either to main the key interest rate at 6.25% this year, or to increase it.'The central bank will not reduce the interest rate this year. In fact, there are risks of increase,' Nicolai Alexandru Chidesciuc, the head of ING Bank Romania declared.

Most analysts will expect more signals from decided people before reviewing estimates, but acknowledge higher inflation risks. For that reason, some of them say there are chances that BNR could have to increase the key interest rate at the end of 2011, for protect inflation targets by 2-4% for 2011 and 2012.

The alternate solution is that BNR maintained the key interest at present level and that it should back the appreciation of the leu, either by direct interventions or by limiting liquid assets gradually, by rising interest rates in the monetary market.

In both situations, profits for long term bonds for 5 years will increase against the present level of 7.2% by increasing loan costs, while the recovery rate, already slow will further slow down.

Any increase of loan cost will be extremely unpopular among Romanians, affected by harsh measures of reducing budget expenses.'

'Risks are higher, but according to recent declarations, we are expecting a message from the central bank,' Ionut Dumitru, head economist at Raiffeisen Bank.Currency appreciation allowed other central banks in Central Europe to maintain interest rates at a low level, during economic recovery, but Poland and Hungary have already increased them and the Czech Republic is expected to have a similar measure.

The leu maintained stable against euro, at a level close to that of June 2010, but the Polish zloty appreciated by 3% and the Czech koruna by 5%.The reference exchange rate announced by BNR on Wednesday dropped by 0.57 bani to 4.2051 lei/euro and reached a new low level after 4 June 2010, the appreciation of the leu being explained by dealers by the indirect previous interventions of the central bank which reduced bank liquidities.

As for compensating the high cost of raw materials expressed in dollars, the zloty appreciated by 17%, the Czech koruna by 19% and the leu only by 12%, while inflation is the highest in Romania.

BNR anticipates that inflation will slow down from 8% in December to 3.6% at the end of the year, while price increases have constantly exceeded bank expectations since 2005.In Romania, food, fuel and energy represent over 50% of inflation, compared to 30-40% in Hungary, Poland, Czech Republic and less in other EU states.

Sursa: http://www.actmedia.eu

Tags: interest central increase level analysts inflation romania bnr reduce euro ing

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