November 7, 2017 / 12:33 PM / 4 months ago

UPDATE 2-Romania central bank holds key rate, tightens deposit/loan gap

(Adds comments, details)

By Luiza Ilie and Radu-Sorin Marinas

BUCHAREST, Nov 7 (Reuters) - Romanian inflation will rise significantly in the short term before stabilising and the central bank will assess the impact of measures it has taken as well as the way prices evolve before acting further, Governor Mugur Isarescu said on Tuesday.

Romania’s central bank kept its benchmark interest rate unchanged at a record low 1.75 percent, and further narrowed the corridor between its deposit and lending rates.

The symmetrical corridor will shrink to 1.00 percent on Nov. 8, from 1.25 percent, affecting interbank rates and increasing the effectiveness of its key rate.

The bank also said it will enforce “firm” liquidity management, changing the rhetoric from “adequate”.

Isarescu said the bank will inject liquidity when the market needs it, but that it could also use reverse repo and deposit auctions to drain excess cash. This will ensure market rates stick closer to the benchmark level, he said.

“We’re entering into an area in which the monetary policy rate effectively becomes the reference rate, it’s the one to watch going forward, and market rates will gravitate around it.”

Asked whether this meant changes in the central bank’s approach towards the exchange rate, Isarescu said it could be more flexible and move “both ways.”

The comments caused the Romanian leu to fall nearly one percent against the euro to its weakest level since August 2012. It has since recovered some of the losses.

The bank has been wary of sharp currency moves in the past, given the dominance of hard currency-denominated loans. Leu loans have taken over in recent years.

Consumer price inflation rose to 1.8 percent in September, from August’s 1.2 percent, above consensus. The bank currently forecasts inflation at 1.9 percent this year and 3.2 in 2018, driven by rising energy prices, a fuel tax and base effect.

The bank, which will announce new inflation forecasts on Thursday, said the new figure for 2017 was “noticeably higher”.

Isarescu said the bank will need to assess the impact of the measures it has already taken. He added the bank was looking to see whether high inflation becomes a trend before it acts.

“We are carefully monitoring the (inflation) trend,” Isarescu said. “Statistically, we expect to have an inflation spike in the first quarter. We expect it will be overcome, so there is no point in reacting to it ... with measures that could damage the economy.”

“But if we see that there is a trend and a rise in inflation that tends to last then of course we will react.”

The bank has kept its key interest rate on hold since May 2015. It is widely expected to start tightening in 2018. (Reporting by Luiza Ilie and Radu Marinas; Editing by Adrian Croft)

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