October 3, 2017 / 11:35 AM / in a year

UPDATE 2-Romanian central bank holds key rate, narrows deposit-lending gap

(Adds governor comment)

BUCHAREST, Oct 3 (Reuters) - Romanian inflation will continue to rise at a slightly faster pace than expected and the central bank will further narrow the gap between its deposit and lending rates, Governor Mugur Isarescu said on Tuesday.

Earlier in the day, the bank kept its benchmark interest rate unchanged at a record low 1.75 percent as expected, but altered overall policy by narrowing the gap between its deposit and lending rates.

The symmetrical corridor will shrink to 1.25 percent from Oct. 4, from 1.50 percent, affecting interbank rates.

The benchmark rate sits in middle of the two, meaning that from Wednesday, the deposit rate will be 0.5 percent and the lending rate will be 3.0 percent.

Isarescu said the bank planned to further narrow the lending-deposit rate gap to 1 percent, possibly at its next meeting.

Inflation stood at 1.2 percent at the end of August. The bank’s current forecast sees inflation jumping from 1.9 percent at the end of this year to 3.2 percent in 2018.

But recent hikes in electricity and gas prices, and a fuel tax, have triggered expectations of higher inflation this year and next. The bank will release new forecasts in November after its last policy meeting of the year.

“The latest assessments reconfirm that ... annual inflation will continue to rise at a slightly faster pace than the medium-term forecast,” Isarescu said.

“Domestically, uncertainties and risks to the forecast are heightened by fiscal and wage policies, as well as the outlook of electricity and gas prices, and food prices.”

Also on Tuesday, the bank injected over 9 billion lei ($2.31 billion) into the market via a one-week repo tender to ease a liquidity squeeze triggered by better tax collection and expectations of higher inflation.

The liquidity squeeze had pushed the ask yield on the 3-month interbank rate up to 1.8 percent on Tuesday, its highest level since late 2014.

The rate is used to determine interest-rate levels for household loans and the prime minister has criticised the central bank for failing to curb rises.

On Tuesday, Isarescu said the bank did not feel pressured by the criticism.

“The rise in interest rates is an unavoidable process,” he told reporters. “For specialists it didn’t come as a surprise. Politicians are more sensitive to the sensibilities of the population, and rightly so.”

The bank, which targets inflation at 1.5-3.5 percent, has kept its key interest rate on hold since May 2015, but analysts say the start of a new tightening cycle is approaching.

“The Romanian central bank’s decision to raise its overnight deposit interest rate represents a move to tighten monetary policy – even though the policy rate was left unchanged,” Capital Economics said in a note.

“Policymakers struck a fairly hawkish tone in the post-meeting press statement and conference, supporting our view that the tightening cycle is likely to be more aggressive than most anticipate.” ($1 = 3.8979 lei) (Reporting by Luiza Ilie; Editing by Alison Williams)

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