Romanian central banker sees no need to tighten policy

Bloomberg

There’s no need at the moment for tighter monetary policy in Romania because the economy is experiencing the “best macroeconomic picture” since the collapse of communism and growth hasn’t become unsustainable, central bank Deputy Governor Liviu Voinea said.
The consumer-led expansion in the European Union’s second-poorest member isn’t showing signs of overheating, recording a positive output gap — which suggests the economic is running beyond its capacity — for only two quarters so far, Voinea said in an interview in Washington. Gross domestic product, which has grown every year since a slump ended in 2010, is set to surge 5 percent this year, he said, citing central bank forecasts.
“We’re completing the recovery process,” Voinea said. “Economic potential could also increase based on enhanced absorption of European Union funds, completed infrastructure projects and higher workforce participation. There’s no immediate need to tighten monetary policy.”
While Romania is experiencing its longest bout of deflation in more than a quarter-century, economic growth has surged, driven by tax cuts before parliamentary elections in December. Critics have said this is unhealthy, and that investment is being neglected. The central bank’s board unanimously decided on Sept. 30 to keep benchmark borrowing costs unchanged at a record-low 1.75 percent, noting “no such signs” yet of overheating.

Leu Plunge
The bank also trimmed minimum reserves requirements for lenders’ foreign-currency deposits. While that move will free up about 500 million euros ($559 million) this month, concern over draft legislation that would allow borrowers to convert Swiss-franc loans at below-market exchange rates prompted banks to hoard euros. As a result, the leu notched its largest weekly fall in three years, weakening 1.5 percent.
“The decline isn’t big in terms of currency volatility up to now,” Voinea said. “Basically, banks are buying foreign currency in order to strengthen their foreign-asset position in anticipation of some legislative initiatives. It’s the reaction of the banking sector — we’ll see if it’s lasting or not.”
Voinea said Romania’s economy had grown more resilient to shocks, with deposits rising and leu loans now making up a bigger share of total credit. While S&P Global Ratings said Friday that uncertainty over fiscal policy will probably subside after the election, it kept Romania’s sovereign credit rating at BBB-, its lowest investment grade. That’s too low, according to Voinea, who deems the nation healthier than it’s being assessed.
“There are also some risks, but they’re containable,” Voinea said. “In view of our fundamentals, we’re underrated.”