Romanian Inflation

From Bloomberg:

Romanian Central Bank Sees End-Year Inflation at 3.9% (Update2)

By Adam Brown

Aug. 6 (Bloomberg) -- Romanian central bank Governor Mugur Isarescu said the inflation rate will probably be little changed at 3.9 percent at the end of the year as rising food, fuel and government prices outweigh declines in other goods and services.

The annual rate should rise from 3.8 percent in June, Isarescu said in a news conference in Bucharest today. The forecast is higher than an end-year prediction he made in May of 3.7 percent.

``The outlook of the National Bank of Romania is a calm, linear one,'' Isarescu said. ``There will be slight variations within the target range.''

Romania's entry to the European Union on Jan. 1 has spurred competition that has helped lower some prices while gains in the local currency helps lower others, Isarescu said. They counter the effect of a drought on food prices and increasing costs of fuel and government-controlled prices.

The leu has gained 6.6 percent against the euro and 11.6 percent against the dollar so far this year, making it the world's seventh-best performing currency and slowing price gains of imported items and goods and services gauged in foreign currencies, such as telephone bills, rents and gasoline.

Target Range

The end-year annual inflation rate estimate is still within the central bank's target range of between 3 percent and 5 percent. The 3.8 percent annual rate in June was down from 4.9 percent at the end of last year.

Isarescu lowered the central bank's estimate for end-year annual inflation in 2008 to 3.7 percent from 4.2 percent. He said the lower forecast stems from an expected pause next year in increases of government-administered prices. He also predicted an end-2009 rate of 3.5 percent.

The central bank on July 31 maintained its key interest rate at 7 percent after four consecutive cuts, citing ``continuing disinflation'' and ``slowing economic growth.'' At the beginning of the year, the Monetary Policy Rate was 8.75 percent.

Today's inflation forecast indicates the central bank doesn't intend to decrease its key interest rate for the rest of the year, analysts said.

``We expect interest rates to remain flat at 7 percent for the rest of the year and see a high probability of a rate hike at the beginning of next year,'' Ciprian Dascalu, senior economist at ING Bank Romania, said in a telephone interview today. ``Their baseline scenario for inflation does not include risks from fiscal loosening and wage policies.''

IMF Warning

The International Monetary Fund has warned inflation pressures will intensify in the second half of the year as wages rise and Prime Minister Calin Tariceanu fulfills his promise to ``spend massively.'' The government ran a balanced budget in the first half although it said spending in the second half will drive it into a full-year deficit of 2.8 percent of gross domestic product.

Tariceanu said the government needs to boost spending on infrastructure, education and other social areas to help catch up with standards in other EU members.

The government also decided in June to double payments to the nation's 6 million pensioners over the next two years, with the first increase coming on Jan. 1, 2008. The government predicts the move will cost 2 billion euros ($2.7 billion) next year alone and targets a budget deficit of 2.7 percent next year.