Romania's central bank may tighten broad monetary policy sooner than expected this year to counter rebounding inflation, provided its measures do not fuel a rise in the leu currency, Governor Mugur Isarescu said. The central bank expects inflation to rebound from negative territory by June, and rising consumption and heavy public spending ahead of two elections this year could add upward pressures.
Consumer prices fell 2.1 percent in January, less than market expectations of 2.7 percent, and the central bank has forecast inflation will reach 1.4 percent at the end of this year and as high as 3.4 percent by end-2017. As a result, Romania's central bank may become the first in the region to start monetary tightening, not by raising interest rates but by narrowing the gap between its benchmark and market rates.
But it needs to time such a move properly to avoid standing out in a region still in easing mode and that has attracted a lot of the cash made available by European Central Bank stimulus. "Our inflation forecast was in line with the (January) figure, that is why I have said we may react on monetary policy sooner than the quarterly inflation report in the fall," Isarescu told Reuters in an interview.
He said policymakers had a wide range of tools to choose from - positive interest rates, high minimum reserve requirements for commercial banks' liabilities, and a gap between its benchmark and money market rates. A reaction would likely come in the form of narrowing the corridor between its lending and deposit facilities, which would in turn impact interbank rates.
Isarescu said there was a "high probability" the bank would narrow the corridor this year, but under certain conditions. "We do not want to boost the leu currency through our measures," he said. "There is no need for that, for...the past one and a half or two years we have felt it is in a fair and sustainable area." "There is that risk, we don't want it to materialise so we must see how to manage it."
Earlier this month, the central bank kept its benchmark interest rate on hold at a record low 1.75 percent. Isarescu said there would be no more cuts, although market rates could still fall given low inflation. "We believe that the benchmark interest rate is currently in a good area to weather an uncertain situation which could come in various ways," Isarescu said.
"We may have capital inflows, in which case the rate is sufficiently low with the current corridor, or we may have capital outflows and then the rate is sufficiently high with a narrowing of the corridor." Isarescu warned higher government spending that could stimulate consumption or "uninspired" legislation, such as a draft bill that would enable all Romanians to give up their mortgaged properties and stop paying loans could trigger capital outflows.
He said the bank saw no threats at a macroeconomic level for now, but that slow structural reforms and normal pressures to raise public spending in an election year created underlying tensions. Isarescu also said the bank was still looking for an opportunity to lower minimum reserve requirements, but that given high public spending, excess market liquidity and the mortgage draft bill, it may "probably be harder to find."
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