April 2, 2019 / 10:28 AM / in 3 months

UPDATE 2-Romanian central bank holds rates, signals tighter market moves

(Adds governor’s comments)

BUCHAREST, April 2 (Reuters) - Romania’s central bank kept interest rates unchanged on Tuesday, as its governor signalled it would act to tighten money market liquidity while inflation remained above target.

Mugur Isarescu said the bank would keep a close eye on inflation to see if the factors boosting it were temporary or longer term, and respond accordingly.

“We have a tightening of monetary policy through strict liquidity control on the money market,” Isarescu told reporters after the bank, as expected, left its benchmark interest rate unchanged at 2.5 percent.

Isarescu said data indicated annual inflation - which rose above expectations to 3.8 percent in February - would remain above the bank’s 1.5-3.5 percent target in the short term. The bank previously forecast it would fall to 3 percent in December.

While he did not specify what actions the bank might take, he said controlling liquidity gave it “a certain flexibility depending on developments” and aimed to “avoid amplifying tensions on the currency market.”

BCR economist Eugen Sinca said tighter monetary policy “does not necessarily mean hikes in the policy rate”, and that he expected the central bank to put its repo tender programme for commercial banks on hold in coming weeks.

If the leu currency weakened again, “a potential liquidity surplus in the market in May could be absorbed through FX interventions,” he added in a note to clients.

The currency has been under pressure from rising budget and current account deficits.

Sinca said he expected liquidity controls to keep a lid on leu depreciation in the short term, but the currency’s mid-term prospects were less clear.

The bank’s moves towards a tighter liquidity regime were undermined in December when the government introduced a tax on banks’ financial assets that it tied to money market rates.

Last week, the government decoupled the tax from market rates, lowering it and exempting several types of assets.

Isarescu said the changes were positive, but that the bill could be improved further.

He also said he hoped commercial banks would respond to the bank’s policy shift by raising interest rates for depositors.

“Just as the period of low interest rates has passed, so too has the period of excess liquidity,” he said.

The leu was 0.1 percent firmer on the day, trading at 4.7550 against the euro at 1310 GMT. (Reporting by Luiza Ilie; editing by John Stonestreet)

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