Romania central bank surprises with rate cut

Romania's central bank made the first interest rate cut in an emerging European Union country since May 2010, surprising markets with a quarter point easing as it tries to support a struggling economy. Policymakers across central Europe are having to tread a fine line between helping economies hit by slowing growth while keeping a high enough investment premium to avoid triggering a sell-off from investors spooked by the eurozone crisis.
Romania's central bank cut rates to 6.0 percent, seeking to balance risks stemming from the eurozone debt crisis against slowing inflation and weak economic growth. It said inflation was expected to stay within its 2-4 percent target band this year and next - it was an annual 3.5 percent in September - but gave little indication on whether more rate cuts were on the cards.
"For the months ahead, disinflation is envisaged to consolidate, along with the downward adjustment of inflation expectations against the background of maintaining a prudent monetary policy stance," the central bank said in a statement. It had previously hinted at a more dovish bias as inflation slowed, but most analysts had expected it to loosen policy by cutting minimum reserve requirements rather than rates as uncertainties over the euro zone debt crisis grow ever bigger.
The leu fell after the decision, erasing morning gains, and was trading 0.1 percent up on the day at 1330 GMT. "The key point is that today's move is unlikely to mark the start of an aggressive easing cycle," said Capital Economics analyst Neil Shearing.
"Indeed, with the crisis in the euro zone seemingly set to deepen, there is a risk that the authorities may ultimately be forced to hike rates once again before too long."
Romania's economic outlook is dominated by slowing growth in other countries of the European Union - Romania's main trade partner - as domestic demand remains weak. Romania's struggling recovery has yet to gain traction and the economy is expected to grow by only 1.5 percent this year, which coupled with harsh austerity measures has sent Prime Minister Emil Boc's popularity rating down to just 17 percent.