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Monday, June 25, 2007

Romanian Interest Rate Cuts?

Bloomberg this morning:

Romania's central bank will probably cut its benchmark interest rate for a fourth time this year to slow appreciation of the leu and help narrow the current-account deficit, a survey of economists showed.

The bank will lower the monetary policy rate to 7 percent from 7.25 percent, according to all seven economists in a Bloomberg survey. An announcement is expected late this afternoon in Bucharest.

The leu has appreciated 2.5 percent against the dollar and 4 percent against the euro since the last reduction on May 2. The annual inflation rate has hovered near post-communist lows while the current account gap is expected to widen in 2007 to 12 percent of gross domestic product from 10 percent last year.

The bank has cut its key rate three times this year from 8.75 percent at the end of last year as the annual inflation rate slowed to 3.8 percent in May from 4.9 percent in December. The central bank targets a year-end annual inflation rate of 4 percent, plus or minus 1 percentage point, this year.

So far this year, the leu has gained 7.5 percent against the dollar and 5.8 percent against the euro, making it the world's 10th-best performing currency. The gains helped widen the current- account deficit to 4.5 billion euros ($6 billion) in the first four months of this year from 2.5 billion euros a year earlier.

Another cut would run contrary to advice from the International Monetary Fund, which said in a report at the end of May that the reductions this year were ``premature.''

The IMF predicted much of the inflationary pressure will come from the government's plans to increase spending, widening its budget deficit to 2.8 percent of GDP this year. It says it needs to boost spending on infrastructure and social programs to help catch up with standards in other EU nations.

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