Romania Extends Record Rate Pause After Inflation Surprise

(Bloomberg) --

Romania extended a record pause in borrowing costs to almost a year and a half after an unexpectedly sharp slowdown in inflation and as central banks around the world loosen monetary policy.

The benchmark rate was left at 2.5% for a 12th straight meeting on Wednesday, as predicted by all economists surveyed by Bloomberg. It’s the first decision by the new board, still led by the Governor Mugur Isarescu, the world’s longest-serving central bank boss.

“The new forecast shows the inflation rate ending this year slightly above target before returning and staying in the upper half of the band until the end of the forecast horizon,” Isarescu said. “I don’t think we’ll need to increase the key rate to achieve the current inflation forecast, especially considering the global trend toward monetary easing.”

While the Federal Reserve and the European Central Bank are deploying stimulus to counter slower economic growth, most eastern European countries are keeping interest rates on hold. In Romania, the economic expansion remains strong and months of above-target advances in consumer prices have abated.

“The external environment will play a greater role in the decisions taken by the central bank, given the ECB’s current loose monetary policy stance,” said Dorina Ilasco, a Bucharest-based economist at Banca Comerciala Romana. “The central bank will also keep an eye on the decisions of other central banks in the region to avoid a high interest rate differential between Romania and its regional peers that would fuel speculative capital flows into the local market.”

Isarescu reiterated his concern about the widening imbalances but said he isn’t “scared” that the situation cannot be solved.

Politics may also be a factor in the central bank’s decision-making. A new minority government took charge this week, while presidential elections begin Sunday.

--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, Michael Winfrey

©2019 Bloomberg L.P.