Thursday, April 10, 2008

Romania economy looks stronger, risks remain-cbank

Wednesday April 9 2008
By Marius Zaharia and Justyna Pawlak

BUCHAREST, April 9 (Reuters) - Romania's economy has shown encouraging signs, such as faster export growth and a more sustainable currency exchange rate, but threats to long-term stability remain, central bank head Mugur Isarescu said.

Speaking at a business conference on Wednesday, Isarescu said the leu exchange rate had returned to levels that were not pushing inflation and helped narrow Romania's vast current account deficit.

Isarescu also welcomed signs that savings rates were increasing and export growth had surpassed that of imports.

But he said more evidence was needed that improvements in trade were "solid" and warned about risks from fiscal policy and potential second-round effects of wage increases on inflation.
"Only three months of figures is not enough. We have to wait one or two quarters to see if what we have is a solid trend (in export growth pick-up)," Isarescu said.

Rampant domestic consumption, mounting wage pressures, a weakening leu and a global spike in food prices have reignited inflation in Romania and prompted the central bank to order four consecutive interest rate rises in recent months.

The current account has also become a problem in recent years but 2008 data so far has shown some pick-up in export growth compared to imports.

Isarescu said he was "prudently optimistic" the recent interest rate increases could help bring inflation -- which was 8 percent in February -- closer to the bank's target, somewhere around 5-6 percent.

"We didn't do enough but we did a lot to make a calibration between monetary policy ... and inflation," Isarescu said.

RATE OUTLOOK

Isarescu also said interest rates may remain in single digits, prompting talk that room for further policy tightening was limited.

Asked whether there was a chance for the benchmark rate, now at 9.5 percent, not to reach double digits, Isarescu told Reuters: "Yes, there is."

This, coupled with Isarescu's comments on currency rates, sent a dovish signal to the market and depressed the leu currency, analysts said.

"Isarescu's comments lower the expectations of foreign players of further aggressive rate hikes and put additional depreciation pressures on the leu," said Ciprian Dascalu, an analyst at Millennium Bank in Bucharest.

The leu pulled back from a five-week high hit against the euro on Tuesday, falling to 3.6770 per euro by 1045 GMT.

Isarescu also told reporters he expected Romanian prices to grow by half a percent in March, bringing the headline inflation figure to a peak this year.
He also reiterated calls on the government to improve fiscal policy and continue reforms, saying any delays could hurt Romania's goal to adopt the euro in 2014.

"Any time lag in the implementation of economic reforms or the unfolding of nominal and real convergence will cause a delay in the euro adoption calendar," he said. (Editing by Michael Winfrey)

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