Tuesday, December 11, 2007

Romania: Inflation easing marginally

Danske Bank Comment

According to the National Statistics Board, Romania's consumer price inflation slowed to 6.7% y/y in November from 6.8% y/y in October. This was slightly above market expectations of 6.5% y/y, but somewhat below our expectation of 7.3% y/y.

More specifically, headline inflation rose by 0.9% m/m in November, with food prices adding 1.2% m/m, non-food prices rising by 0.6% and finally services costs rising by 1.2% m/m. The main reason for the drop in inflation is related to a high base effect, and today’s release is therefore not comforting for the Romanian central bank, which recently reversed some of the cuts it made at the beginning of the year, when it lifted its leading rate to 7.5% in October.

Underlying inflationary pressures still persist in the Romanian economy, given strong domestic pressures, high wage growth, a recent weakening of the leu and pro-cyclical fiscal policy. Going forward, we expect a further easing of fiscal policy in 2008, an election year, and this should leave the central bank with no choice but to tighten monetary conditions further over the coming 12 months.

We expect it to deliver a 50bp hike in January and to lift the policy rate to 9.0% by year-end 2008. Today’s release was slightly negative for the Romanian markets. Rates and yields were up a little and the currency has weakened slightly, currently trading around EUR/RON 3.514. Going forward, we expect further weakness in the fixed income and currency markets.

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