Thursday, February 12, 2009

Romania's inflation climbed to 6.7 percent

BUCHAREST, Feb 12 (Reuters) - Romania's inflation climbed to 6.7 percent on the year in January while December industrial output plunged as shrinking global demand hammered manufacturing.

The data, released on Thursday, underlined the double whammy facing Romania -- a sharp weakening of economic activity and at the same time reignited inflationary pressures.

Most economists see the poor Black Sea state as one of the most vulnerable in Europe because of its vast current account deficit, which means most foreign investors have long fled its markets, leaving the leu trading near record lows to the euro.

This has boosted the cost of services, frequently priced in euros, which rose 3.3 percent last month compared with an overall monthly increase in prices of 1.2 percent, and created a policy dilemma for the central bank.

"We have contradicting signals from inflation and industrial output figures. It's a pretty bad combination," said Ionut Dumitru from Raiffeisen Bank in Bucharest. "The only signal this gives for the central bank's next rate decision is prudence."

Unadjusted industrial output dropped 19.2 percent on the month in December and fell 18 percent year-on-year.

The central bank cut interest rates in February for the first time in 19 months, and many economists expected further easing.

Most of Romania's post-Soviet bloc peers have started cutting rates in recent months but Bucharest had delayed easing because of concerns over price pressures.

REVERSAL OF FORTUNE

Only months ago, the Romanian economy was the fastest-growing in the European Union and widely seen as overheated.

But investors now fret over Romania's ability to finance growing private debt and a vast trade imbalance.

On Thursday, current account data showed the deficit rising by a mere 1.2 percent last year to 16.9 billion euros, underlining signs of stabilisation as global slowdown curbs Romania's spending spree.

Most economists still expect Romania to post some growth this year but several, including from the International Monetary Fund, say recession is a realistic risk.

"Given that a lot of service prices are directly linked to the euro, the inflation rate defied the general trend in the region," Bartosz Pawlowski from TD Securities in London wrote in a note.

"At the same time, the economy is heading for a hard landing ... and we think that the worst is yet to come."

Following the data releases, the leu hit session lows against the euro at 4.3078 , compared with last month's record low of 4.3530, but later regained some ground.

The central bank's chief economist Valentin Lazea moced to reassure markets, saying a leu decline towards 4.3 per euro is not line with fundamentals. (Additional reporting by Luiza Ilie, Marius Zaharia and Ioana Patran, editing by Mike Peacock)

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