Wednesday, March 11, 2009

Romania's Feb inflation quickens, rates seen flat

BUCHAREST, March 11 (Reuters) - Romania's annual inflation rate quickened to 6.9 percent in February from January's 6.7 percent, above market expectations, underlining how a weak leu currency has reignited inflationary pressures.

Analysts see Romania as one of the most vulnerable countries 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 continued to boost the cost of services, frequently priced in euros, which rose 1 percent last month and created a policy dilemma for the central bank.

'For interest rates, the figure means that it is likely not to see a cut. The central bank cannot afford to cut rates aggressively, but in the same time they must do something because the economy is slowing sharply,' said Nicolaie Alexandru-Chidesciuc of ING (nyse: ING - news - people ) Bank in Bucharest.

'They will probably opt not to cut rates, but to cut minimum reserve requirements for leu liabilities,' he added.

Data from the National Statistics Board showed prices increased 0.9 percent on the month in February, with food costs rising 0.3 percent. Non-food items were 1.3 percent up due mainly to a 3.3 percent increase in fuel prices.

Analysts polled by Reuters had produced a mid-range headline inflation forecast of 6.5 percent and a month-on-month figure of 0.5 percent.

The central bank targets inflation of 2.5-4.5 percent in December and its 2009 forecast stands at 4.5 percent.

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, prompting Bucharest to seek a bailout plan involving the EU and the IMF.

An International Monetary Fund mission arrived in Romania on Tuesday, a Fund official said on Wednesday, to assess Romania's macroeconomic developments and a possible aid programme.

The mission will have meetings with Romanian leaders including the central bank governor, finance minister and other officials between March 11-25.

There have been no details on the size of the bailout which would comprise EU funding, but economists say it could amount to around 20 billion euros, near the $25 billion of IMF, EU and World Bank money agreed in a bailout of Hungary last October.

Data showed the indicator excluding administered prices rose 0.7 percent in February while the harmonised inflation index was up 7.7 percent.

Following the data releases, the leu firmed to 4.2768 against the euro, compared with Tuesday's close of 4.2848 and last month's record low of 4.3530.

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