February 11, 2020 / 12:28 PM / 11 days ago

UPDATE 1-Romanian cenbank lowers 2020 inflation forecast, key rate at right level

(Adds Governor quotes)

BUCHAREST, Feb 11 (Reuters) - Romania’s central bank cut its annual inflation forecast for this year on Tuesday and Governor Mugur Isarescu said the current benchmark interest rate level might be enough to bring prices down.

Policymakers kept the rate unchanged at 2.50% as expected earlier this month and delivered a surprise cut to minimum reserve requirements for banks’ hard currency liabilities.

“We have found that monetary policy rate level which has helped us keep inflation under control, but not just the rate, we acted will all the tools,” Isarescu told a news conference to present the quarterly inflation report.

“Going forward, it might be sufficient to keep the interest rate and other monetary conditions here.”

The bank cut its 2020 inflation forecast to 3% on Tuesday from a previous estimate of 3.1%. It sees inflation at 3.2% next year, within its 1.5-3.5% target.

Analysts polled by Reuters expect inflation of 3.4% at the end of this year.

Isarescu said inflation will fall as low as 2.8% at the end of the first quarter as supply side shocks subside.

He said domestic risks to the inflation outlook stemmed from fiscal and income measures whose timing and pacing were uncertain ahead of two elections this year.

Romania’s interim government of Prime Minister Ludovic Orban is trying to trigger early elections, a complicated process that could take weeks or months of political wrangling and stalled policymaking at a time when widening budget and current account deficits are pressuring Romanian assets and rating outlooks.

Isarescu reiterated widening budget and current account deficits were a big concern for the Romanian economy and warned monetary policy instruments alone would not help rein them in.

He also said the weakening of the Romanian leu, which would help narrow the external shortfall, would lead to other problems, and reiterated that deficits should be gradually contained to avoid abrupt shocks to the economy.

“We have two large deficits and we must sit down and talk about them seriously,” Isarescu said.

“For the current situation of the Romanian economy, monetary policy instruments are not adequate. There is no substitute for a correct mix of monetary, fiscal and income policies.” (Reporting by Luiza Ilie, editing by Ed Osmond)

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