October 3, 2019 / 10:54 AM / 14 days ago

UPDATE 2-Romania's central bank keeps benchmark rate on hold

(Adds governor)

BUCHAREST, Oct 3 (Reuters) - Romania’s central bank kept its benchmark interest rate unchanged again at 2.50% on Thursday, treading a fine line between reining in above-target inflation and the risk of exacerbating the country’s current account deficit.

Governor Mugur Isarescu said the decision to keep rates unchanged after the world’s largest central banks have cut theirs amounted indirectly to policy tightening.

“Today’s decision was not a non-event,” he told reporters.

He also said inflation is expected to remain above the bank’s 1.5-3.5% target this year, although at a lower level than previously forecast. The bank’s current inflation forecast stands at 4.2% at year-end.

Monetary policy loosening by the world’s largest central banks has so far eased pressure to act on policymakers in central Europe, where consumption-driven economic growth has mostly held up in the face of a euro zone slowdown and concerns over Britain’s exit from the European Union.

In Romania, consumption-friendly wage and pension hikes have fuelled the budget and current account deficits. The central bank has said it needs to balance curbing inflation against the risk of a potential rate hike strengthening the leu currency, which would amplify the external shortfall.

Romania’s inflation rate slowed to 3.9% in August.

The European Union state is holding three elections this year and next while the government also faces a no-confidence vote in parliament on Oct. 10 after losing its junior coalition partner.

“The fiscal policy stance for 2020 and beyond is a major source of uncertainty for the central bank’s monetary policy, especially in the context of a pending no-confidence vote in parliament,” BCR Bank said in a note.

“A loose fiscal policy in 2020 would overburden monetary policy and the central bank would find itself in a position of having to maintain a tight monetary policy through strict control of money market liquidity for a long period.”

While capital markets have so far taken the political uncertainty in their stride, stalled policymaking, rising deficits and a long election cycle are weighing on the currency.

The Romanian leu edged 0.1% lower versus the euro on Thursday. It has fallen 2% so far this year, the region’s second worst-performing currency after the Hungarian forint.

The central bank has held its benchmark interest rate at 2.50% since it raised it by 50 basis points in May 2018 to combat a surge in inflation. It has tightened policy since then by controlling money market liquidity. (Reporting by Luiza Ilie; Editing by Hugh Lawson)

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