Romania’s recovery will be two-speed, with industrial output boosted by foreign demand (especially from Germany) while domestic demand will remain sluggish, writes a report from UK-based macroeconomic research consultancy Capital Economics.

The Capital Economics analysts expect the Romanian Central Bank to keep rates on hold this year and instead expect it to curb imported inflation through supporting the Romanian currency leu. “This will erode export competitiveness, so we expect such moves to be short lived, with a correction in the leu by year-end,” according to the report.

The analysts also believe that the Romanian National Bank will maintain the monetary policy interest  rate this year, opting to reduce the inflation by helping the Romanian leu (RON), which will result in lower cost imports. In this context, the monetary course will suffer a correction by the end of the year.

Liquidity conditions "remain benign" and capital reserves are significantly above the limits imposed by the International Monetary Fund, which should enable banks to start credit again once the economy recovers, the analysis also shows.

"Given the fragility of the economy, we anticipate that interest will be maintained this year, but the central bank will try to push up the RON in the coming months to reduce import inflation. It may even intervene in currency markets to support the currency on short-term”, according to the economists from Capital Economics.

Strengthening the RON will not be on long term, first of all because inflationary pressures will cease in 2012 and second of all because the currency appreciation will affect export competitiveness.

The full report here.

Alex Camburu, alex.camburu@romania-insider.com