BUCHAREST: Romania's central bank cut interest rates to a record low on Thursday, further beefing up its support for a fragile economy amid hopes that tough government action on public finances means investors will not be deterred by falling returns.
Romania's economy nudged back to growth of about 2.5 percent last year but is still recovering from the shock of a more than 8 percent contraction in 2009 and 2010, prompting the central bank to bring borrowing costs down to 5.50 percent.
It was the bank's third quarter-point cut in a row. Monetary policymakers in Romania and the wider central European region are treading a fine line between countering threats to economic growth and keeping a high enough premium to attract investors worried about the impact of the euro zone debt crisis.
The Czech central bank is also expected to lean towards stimulus later on Thursday by maintaining an ultra-loose monetary policy as faltering growth and risks from the euro zone outweigh concerns over inflation.
"Unfortunately, the contraction in European Union demand isn't being compensated by the recovery in domestic demand, so the relaxation of monetary policy is one of the few measures Romania can take," said Volksbank economist Melania Hancila.
"The central bank will probably lower interest rates even further, to 5 percent, during the first half of the year."
Unlike in neighbouring Hungary, Romanian Prime Minister Emil Boc has stayed the course with the International Monetary Fund and implemented tough austerity measures, bringing the budget gap under control but thereby also putting a brake on the recovery from a deep recession.
But Boc has been rocked by three weeks of anti-government protests, commands less than 20 percent support in opinion polls and urgently needs the economy to gain momentum if he is to stand a chance in November parliamentary elections.
The leu was unmoved by the rate decision and traded 0.1 percent higher on the day at 4.344 per euro by 1031 GMT
Annual inflation slowed to 3.1 percent in December, well within the central bank's target band and giving it scope to cut borrowing costs.
Ten of the fourteen analysts that contributed to a Reuters poll had expected a rate cut to 5.5 percent. For the end of the year the median forecast is for rates at 5.25 percent.
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