Tuesday, November 11, 2008

Romanian inflation higher in Oct on weaker leu, food

BUCHAREST, Nov 11 (Reuters) - Romania's inflation surprised with a rise in October due to food costs and a currency that has fallen victim to the global financial crisis, likely pushing back expectations of cuts in interest rates.

Inflation rose to 7.4 percent from September's 7.3 percent, above expectations of 7.0 percent, and analysts said that would likely delay any possible fall in borrowing costs to bolster an economy set to slow sharply next year.

'This is a big disappointment, and it could mean the central bank may postpone the moment when they start to cut rates,' said Otilia Ciotau from Piraeus Bank in Bucharest.

Market watchers also say concerns about Romania's unclear fiscal policy in the run-up to the Nov. 30 parliamentary election and in the following weeks are likely to weigh in much on the decision.

Data showed prices rose 1.1 percent on the month in October, with food costs rising 1.1 percent, with cheese, milk and vegetables recording the steepest increases. Non-food items were 0.5 percent up while services grew 2.2 percent.

The INS said the European Union harmonised index was up 7.9 percent on the year. The indicator of prices excluding administered prices grew by 1.2 percent on the month.

Market watchers said a weaker leu currency, which has fallen in the last month as ratings agencies cut Romania's debt to junk status, would also weigh on the central bank's rate-setting decision on Jan. 6.

The leu hit a 4-year high of 3.94 early last month but has lost around 5 percent versus the euro in the past three weeks.

'We see a high increase in vegetable prices ... but we also see other prices up due mainly to a weaker leu currency,' said Ionut Dumitru, head of research at Raiffeisen Bank.

'I had expected a rate cut at the bank's first meeting next year, but the data published today lowers (the) chances.'

The central bank countered a spike in inflation this year, driven by consumption and high energy and food prices, by raising interest rates by 325 basis points to 10.25 percent, among the highest levels in the EU.

The bank's official forecast for end-year inflation is 6.7 percent, still way above the target range of 2.8-4.8 percent.

Fitch became on Monday the second rating agency after Standard & Poor's cut Romania's status to below investment-grade, citing concerns over economic policies. The downgrades mean it is the only EU member at 'junk' level.

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