BUCHAREST: Romania’s central bank kept its benchmark interest rate unchanged as expected at a record low 1.75 percent on Thursday to give it more time to assess the impact of Britain’s vote to leave the European Union and domestic factors. Governor Mugur Isarescu said the bank will follow a more “pragmatic” approach to policymaking, based on economic events. The bank has significantly lowered its inflation forecasts for this year and next, with consumer prices now seen in negative territory throughout 2016 before rebounding to just under 2.5 percent, the bank’s mid-point target, he said.
Romania has been in deflation all year, with prices falling a bigger-than-expected 0.7 percent yearly in June due to cuts in value-added tax. Oil prices and local energy prices have likely influenced the new forecasts, due out officially on Aug. 8. However, despite negative inflation, monetary policy easing is unlikely, as surging consumption and wage rises far outpacing productivity are fuelling inflationary expectations and a December parliamentary election has heightened uncertainty.
The bank’s inflation forecasts stand at 0.6 percent in December and 2.7 percent at end-2017. Its inflation target is 1.5-3.5 percent. “It is difficult to measure inflationary expectations at the moment, which is why our approach going forward will be more pragmatic, we will make the appropriate decisions based on events developments,” Isarescu told reporters. The bank’s Czech counterpart also kept rates unchanged on Thursday, with both banks waiting to see how Brexit will affect the domestic economy and their European export markets.
In addition to Britain’s pending exit from the EU, Romanian policymakers must also factor in domestic policy uncertainty. Romania’s technocrat government has fragile parliamentary support and just four months to go before an election. “This is in line with our call,” ING said in a research note. “(An) event-driven policy response given the high forecast uncertainty over the next half a year, with US elections, Brexit fallout and domestically, parliamentary elections and risks for fiscal slippages.” The leu currency edged 0.1 percent lower versus the euro to 4.4600 by 1455 GMT.
