(Adds governor, details, more background)
By Luiza Ilie
BUCHAREST Feb 7 Romania's central bank left its
benchmark interest rate unchanged on Tuesday at a
record low of 1.75 percent, as expected, maintaining a cautious
stance after street protests forced the government to ditch a
Consumer prices fell by an expected 0.5 percent on the year
in December and have been in negative territory throughout 2016
following cuts in value-added tax and lower energy prices. The
central bank targets inflation at 1.5 to 3.5 percent.
Governor Mugur Isarescu said inflation was expected to
return to positive territory in the first quarter, but that a
new end-2017 forecast that will be revealed on Thursday will now
fall below an initial estimate of 2.1 percent.
"Inflation will re-enter the target band towards the end of
2017 and at the start of 2018 will reach the upper half of this
range," Isarescu told a news conference.
Asked about the possible impact of the mass street protests
that have shaken the leftist=led government over the past week,
Isarescu said: "Instability and political tensions cannot help.
To quote one of today's (newspaper) headlines, the economy is
minding its business but we must not test it."
At least half a million people joined street protests around
Romania, outraged by a late-night decree adopted on Feb. 1 that
aimed to decriminalise some graft offences. The government
rescinded the decree on Sunday.
Isarescu said the biggest internal risks to Romania's
financial stability stemmed from the government's fiscal and
Earlier on Tuesday Romania's parliament approved a 2017
budget plan with increased social spending. It set the deficit
at 3 percent of national output, the EU's ceiling, and projected
economic growth of 5.2 percent.
Isarescu said the plan's revenue estimates were ambitious,
while spending plans were "rather optimistic".
Analysts had forecast no change in rates on Tuesday, but
most expect increases towards the end of 2017. The next central
bank meeting is on April 5.
The bank has signalled that it may first shift monetary
policy not via its key rate but by narrowing the corridor
between its lending and deposit facilities, which would in turn
affect interbank rates.
ING Romania chief economist Ciprian Dascalu said the bank
could begin narrowing the corridor as early as the next
Isarescu said external risks to inflation stemmed, among
other things, from the diverging monetary policies of the
world's largest central banks and Britain's exit from the
Romania's leu currency, driven by the political uncertainty
to 7-month lows last week, extended its recovery on Tuesday as
investors refocused on Romania's healthy growth outlook.
The leu was up 0.3 percent on the day against the
euro, bid at 4.4909 at 1435 GMT, supported by comments made by
Romania's president in parliament and by a constitutional court
decision to reject a Swiss franc loan conversion bill.
(Editing by Gareth Jones)