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BUCHAREST, Nov 6 (Reuters) - Romanian inflation will stay slightly above target this year before falling to its upper range in 2020, but the central bank’s benchmark interest rate will remain negative, Governor Mugur Isarescu said on Wednesday.
Earlier in the day, the bank kept its benchmark interest rate unchanged at 2.50% as expected as policymakers must balance the need to rein in inflation and a potential firming of the leu currency should they raise interest rates.
The bank has said a widening current account deficit was worrying, and a stronger leu would not help.
Inflation slowed to 3.5% on the year in September, at the upper end of the bank’s 1.5-3.5% target. The bank, which will release new forecasts on Nov. 8, had previously expected inflation to be at 4.2% by year’s end and 3.4% in 2020.
Isarescu said the forecasts will be lower than previously envisioned.
“We will remain with a monetary policy rate below the inflation rate, but that is the trend in Europe and worldwide for the most part,” Isarescu told reporters.
He added that policy decisions by the European Central Bank, the U.S. Federal Reserve and regional peers will influence the course of local policy.
Loose ECB and Fed policies have eased pressure to act on policymakers in central Europe, where consumption-driven growth has held up in the face of a euro zone slowdown and concerns over Britain’s exit from the European Union.
“The central bank will also keep an eye on the decisions of other central banks in CEE to avoid a high interest rate differential between Romania and its regional peers that would fuel speculative capital flows into the local market,” Romania’s BCR bank said in a research note.
“Our baseline scenario is that the central bank will keep the key rate at 2.5% next year.”
All analysts polled by Reuters had expected Wednesday’s decision. Policymakers, who last hiked rates in May 2018, have since adjusted monetary policy by controlling money market liquidity.
Expansionary fiscal and wage policies have increased Romania’s budget and current account deficits, weighing on asset prices.
A long election cycle was also complicating policymaking, with a presidential election kicking off on Sunday and local and parliamentary elections in 2020.
The Romanian leu was down 0.2% versus the euro at 1430 GMT, unchanged from levels before the meeting. (Reporting by Luiza Ilie; Editing by Jon Boyle and Ken Ferris)