IMF sees Romania growth steady at 2.2%, as bank cuts interest rate

Romania's economy will grow faster than the rest of the region in 2014, the IMF said Tuesday, while the central bank cut interest rates to a record low to boost domestic demand.

"In 2014, real gross domestic product growth in Romania is forecast to stand at 2.2 percent, with drivers switching gradually from net exports to domestic demand", the International Monetary Fund's chief of mission Andrea Schaechter told a press conference after a ten-day assessment in Bucharest.

In confirming the 2014 forecast, she stressed that "projected growth is relatively strong compared to the region."

The IMF also revised upwards its growth forecast for 2013, from 2.0 percent to reach 2.2 percent, driven by strong agricultural output and exports.

Romania is expected to better perform than most of its Central and Eastern European neighbours.

So far, Poland and Hungary have respectively forecast growth of 1.5 percent and 0.7 percent this year while the Czech Republic should see a 1.0 percent contraction of its GDP.

Schaechter added that public investment financed by European funds should spur expansion in 2014.

The EU has set aside nearly 20 billion euros for Romania to catch up with more developed countries in Europe, to be spent before 2015.

In a separate move, Romania's central bank trimmed Tuesday its main interest rate by 0.25 point to a record low level of 4.0 percent, the fourth cut since July.

"The improvement in inflation developments and the related outlook has enabled the central bank to gradually adjust the monetary policy stance over the past few months", the bank said in a statement.

The annual inflation rate dropped to 1.88 percent in September from 3.67 percent a month earlier due to "a significant decline of food prices as a result of bumper crops and a cut in the VAT rate for bread and some bakery products", the bank stressed.

Though the successive rate cuts have favourably "fed through, albeit with a certain lag, to lending rates to the real sector", the bank strssed the need to go further in order to boost a weak internal demand.

"There is still room for lowering lending rates for companies and households, in compliance with prudential rules", the board underlined.

William Jackson at London-based Capital Economics said "there's a growing chance of one or two more rate cuts".

He pointed at the positive review of the IMF precautionary agreement, a "financial backstop that should help support capital flows into Romania".

Romania in July concluded a new deal with the IMF and the EU on a 4.0-billion-euro precautionary credit line, which the government intends to tap only in the case of a crisis.

Schaechter said that the deal concluded in July was "broadly on track", even if revenues were weaker that expected.

The IMF and the government agreed on a slight reduction of the public deficit in 2014, from 2.5 percent of GDP in 2013 to 2.2 percent.

The centre-left government on Monday said it would raise the minimum wage from 800 lei ($242) to 850 in January and 900 lei in July, and increase pensions by 3.76 percent, in line with inflation.

The extra spending will be offset by a new excise tax on fuel, a rise in royalties on natural resources except for oil and gas, and a tax on buildings that were so far exempt from taxation.

In 2009, when it was in the grips of a severe recession, Romania concluded a 20-billion-euro bailout deal with the IMF and the EU, in exchange for strict austerity measures.

In March 2011 it signed a new, 5.0-billion euro stand-by agreement.