Wednesday, September 26, 2007

Romania: Unchanged rates despite inflation risks

September 26, 2007
Lars Christensen, Senior Analyst, Danske Bank

The Romanian central bank (NBR) has just announced that it has kept its key policy rate unchanged at 7.00% – in line with ours and the consensus expectation. However, NBR signalled a more cautious stance than earlier. The market reaction to the decision has been limited, but we expect the recent weakness in the Romanian leu to re-accelerate in the coming days and weeks.

Looking ahead we see room for significantly more weakness in the Romanian leu and that is likely to "force" the NBR to hike its key policy rate in the coming months. In that respect it should be noted that the NBR mentioned in the rate decision that the short-term inflation outlook had deteriorated due to drought (and therefore higher food prices) and uncertainty over the outlook for the leu.

That undoubtedly is a signal that there is a limit to how far the NBR will “allow” the leu before taking action. That said, NBR is notoriously dovish and we believe it is already behind the curve and hence we believe that the NBR will probably “lose” the fight to keep inflation in line with its official inflation target (3%-5%).

We remain bearish on the outlook for the Romanian FX and fixed income markets due to Romania's large internal and external imbalances and a significant overvaluation of the leu. Hence, we continue to recommend investors to buy EUR/RON with a target of 345.

No comments: