Romanian c bank holds rates, eyes crisis impact

Analysts polled by Reuters this week forecast no change in borrowing costs, arguing that worries about the effect on inflation from loose fiscal policy necessitated tight monetary policy.

However, most said a new hike was not on the cards as markets had stabilised in recent sessions and the Romanian leu appeared fairly supported.

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'It is in line with consensus so the market will not be disappointed with the decision,' said Lucy Bethell from Royal Bank of Scotland in London.

'Further decisions would depend on global financial conditions which could make the leu more vulnerable next year.'

The central bank will issue a detailed statement about the decision around 5.30 p.m. local time (1530 GMT).

The move follows a similar decision by Poland on Wednesday and a cut by Slovakia on Tuesday.

Romania's markets have fared somewhat better during the global financial meltdown than in the neighbouring Hungary, which had to lift borrowing costs by 3 percentage points last week to shore up investor sentiment and sought financial help from the International Monetary Fund.

After the rate decision the leu stepped back from a 6-day high against the euro set in early trade on the back of regional optimism. And analysts said market sentiment remained shaky.

The leu has see-sawed in volatile trade in recent weeks, as investors fretted about Romania's economic prospects with its vast external imbalances making the country more vulnerable to financial trouble than some of its neighbours.

Several analysts said Romania may still have to seek rescue packages from the IMF in the future if the market situation deteriorates.

Concerns about Romania's economic standing worsened this week, when Standard & Poor's cut its foreign currency credit rating one notch to 'BB+', putting it back at junk status with a negative outlook and citing a lack of policy response to mounting economic risks.

In good news, Romanian inflation began to ease in recent months, coming off a three-year high of 9 percent set in July to 7.3 percent in September, as lower food and fuel costs offset price pressures stemming from domestic consumption.

Household spending is expected to slow down next year but fiscal pressures may remain high due to welfare spending pledges put into law this year and wage demands from the public sector.

But despite the central bank's steep monetary tightening this year, which totalled 325 basis points over 12 months, annual prices are still seen topping the bank's December target range of 2.8-4.8 percent and reaching some 6 percent.