Monday, February 11, 2008

Romanian Central-Bank Head Warns of Overheated Economy

WSJ.com
By ALKMAN GRANITSAS
February 11, 2008; Page A12

THESSALONIKI, Greece -- Romania's government must cut spending to fight economic overheating and runaway inflation, or face higher interest rates, the head of the country's central bank said.

With inflation galloping well above the central bank's comfort zone and the Romanian leu on a downward path against the euro, National Bank of Romania Gov. Mugur Isarescu signaled that another rate increase could come as soon as the next monetary policy meeting, March 26.

"What we need to clearly fight against inflation is not to rely just on monetary policy, which is already overburdened," Mr. Isarescu said in an interview in this northern Greek city. "We need a change in our policy mix, which means more restraint on fiscal policy and on wage policy."

Romania's central bank raised rates Feb. 4 to 9%, the highest level in almost three years, to combat soaring prices. Inflation in Romania rose to 6.6% at the end of last year from 3.7% in March. It is likely to come down to 5.9% by the end of this year, according to revised forecasts, Mr. Isarescu said Thursday. Romania's central bank has an inflation target of 3.8% for year end, with a range of one percentage point either way considered acceptable.

As in the rest of Europe, Romania's inflation is being driven by rising energy and food prices -- made worse by a severe summer drought last year.

Prices in Romania have also been pushed up by the decline in the leu because many local prices are indexed to the euro. After having risen powerfully in 2006 and early last year, the leu declined around 15% against the euro since July.

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