(Adds cenbank, analyst)
By Luiza Ilie
BUCHAREST, Aug 4 (Reuters) - Romania’s central bank kept its benchmark interest rate unchanged at a record low 1.75 percent on Friday, but said reasons to tighten policy were adding up.
Governor Mugur Isarescu said the latest inflation forecasts, to be formally released Tuesday, have been revised upwards -- largely driven by higher energy prices.
But they are still within the bank’s 1.5-3.5 percent target range.
The bank currently sees inflation jumping from 1.6 percent at the end of this year to 3.1 percent in 2018, driven by strong domestic demand.
This is in sharp contrast to the deflation that ran from mid-2015 until January this year. It stood at 0.9 percent year-on-year in June.
“Price developments in Romania are under control for now, inflation is one of Europe’s lowest, but it is just as true that this period of negative inflation is ending,” Isarescu said.
He added the bank was paying more attention to actions taken by regional and European central banks than in the past.
“Arguments to act in the following period are piling up but we cannot make a decision disconnected from what is going on in our region and in Europe in general,” he said.
Earlier this week, the Czech central bank delivered the European Union’s first major interest rate hike for more than five years.
The European Central Bank, however, remains on hold, meaning any hiking elsewhere could bring unwelcome currency strengthening against the euro.
Isarescu said that in terms of interest rates, Romania is most comparable with Poland among its regional peers. The Czech Republic, for example, had near zero percent interest rates before it raised them.
Most analysts polled by Reuters expect the Romanian central bank to keep its key interest rate unchanged at end-2017.
The bank, however, has signalled that any first change to monetary policy may come not via its key rate but by narrowing the gap between its lending and deposit rates, which would in turn affect interbank rates.
“We continue to look for the central bank to leave the key rate untouched throughout this year, while keeping a close eye on the moves of its regional counterparts,” BCR said in a research note.
“However, we do not rule out a deposit rate hike towards the end of this year, especially if the ECB decides to finally break the tapering announcement.”
Isarescu said the inflation outlook was clouded by uncertainties stemming from domestic fiscal policies and a pending budget revision as well as Brexit talks and euro zone growth.
The leu currency was flat against the euro at 4.5650, but it has weakened 0.6 percent since the beginning of the year due to fiscal uncertainty.
Reporting by Luiza Ilie Editing by Jeremy Gaunt.