April 5, 2017 / 10:44 AM / 4 months ago

UPDATE 2-Romanian central bank keeps benchmark interest rate on hold

3 Min Read

(Adds governor comments)

BUCHAREST, April 5 (Reuters) - Romania's central bank left its benchmark interest rate unchanged at a record-low 1.75 percent on Wednesday, as expected, balancing low inflation against underlying pressure from rising wages.

Governor Mugur Isarescu said inflation would remain significantly below the central bank's 1.5-3.5 percent target in the coming months and likely push through the lower margin towards the end of the year.

Inflation edged up 0.2 percent on the year in February. Consumer prices were in negative territory throughout 2016, driven by tax cuts and low fuel and energy prices.

The central bank forecasts inflation will reach 1.7 percent by the end of the year. But it expects wage rises and strong consumption to push inflation to 3.4 percent by the end of 2018.

The net average monthly wage rose by 18.4 percent to 2,300 lei ($542.08) in January, driven by labour shortages and sharp hikes in the public sector. The government plans more hikes over four years under a single wage bill for public administration.

Romania is the European Union's second poorest country.

"There are labour shortages in several sectors," Isarescu said. "Wage rises are inevitable and ... what must be done is to keep them under control in a reasonable manner. Wage rises are not ... a problem, but their scope and dosage are."

The central bank has kept its benchmark rate steady at 1.75 percent since May 2015.

It has signalled that it may first shift monetary policy not via its key rate but by narrowing the gap between its lending and deposit rates, which would in turn affect interbank rates.

On Wednesday, Isarescu said the bank's goal was to narrow the corridor to 1 percentage point from the current 1.5 percent to boost the effectiveness of its benchmark rate, but that the timing of such a move depended on short-term capital inflows.

"Narrowing the corridor to plus/minus 1 percent is a stated goal and ... it depends on capital flows. Short-term capital inflows are not sustainable, it is one of the big problems exposed by the financial crisis and ... especially so for emerging markets."

The leu was up 0.3 percent on the day against the euro at 1445 GMT.

Isarescu also said the bank would continue to look for windows of opportunity to further cut minimum reserve requirements for commercial banks’ hard-currency liabilities. (Reporting by Luiza Ilie; editing by Mark Heinrich)

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