Tuesday, December 11, 2007

Romania inflation marginally down, rates seen up

By Radu Marinas and Marius Zaharia

BUCHAREST, Dec 11 (Reuters) - Romania's annual inflation eased only marginally to 6.7 percent in November from October's 6.8 percent, increasing expectations of an interest rate rise in January. Prices rose 0.9 percent on the month in November, with food and non-food prices growing 1.2 percent and 0.6 percent respectively, while services costs rose 1.2 percent.
Analysts polled by Reuters last week had produced a mid-range forecast of headline inflation at 6.5 percent year on year and 0.8 percent month on month.

The European Union-harmonised index was up 4.8 percent on the year, the National Statistics Board (INS) said. The indicator of prices excluding administrative prices rose 1 percent month-on-month in November.

The central bank has raised its annual inflation forecast to 5.7 percent in December from a previous prediction of 3.9 percent, citing higher food prices due to drought and a worsening outlook for the leu currency.

The bank targets inflation at 3-5 percent this year and 2.8-4.8 percent in 2008.
"November data, impacted by a strong base effect, are not comfortable for the central bank at all ... It is clear that the bank will need to hike rates in January," said Florin Citu, ING Bank chief economist in Bucharest.

The bank raised rates by 50 basis points to 7.5 percent on Oct. 31, reversing some of the cuts it made earlier this year.

Analysts say pressures from wages and a loose fiscal policy will continue in 2008, an election year, and that a leu drop of more than 5 percent in November would be the main reason for the bank to increase rates again to curb import costs quickly.

The government, trade unions and employers' associations have agreed a 28 percent rise in the minimum monthly wage to 500 lei ($208) from 2008. An additional rise to 540 lei will come into force from July 1 if macroeconomic targets are reached.

The main opposition party, the Social Democrats, have threatened to block the 2008 budget in parliament unless the minority cabinet agrees on a rise to 640 lei.

The central bank has repeatedly urged the centrist government to tighten fiscal policies and keep wage growth in line with productivity to help contain inflation and boost economic competitiveness.

"The offer of food products remains low and food imports are rising with higher costs because of the leu depreciation," said ABN Amro's analyst Catalina Constantinescu. "A rate hike is imminent as we might see December inflation at around 6.5 percent, way above the central bank's forecast."

At 0920 GMT, the leu was quoted at 3.5131/91 against the euro compared with Monday's close of 3.5147 and a nearly two-year low 3.69 hit on Nov. 23. (Editing by David Stamp)

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