Wednesday, June 10, 2009

Romania inflation eases in May, rate cuts seen ahead

BUCHAREST, June 10 (Reuters) - Romania's annual inflation slowed to 6 percent in May from April's 6.5 percent, hardening expectations of a 50 basis points rate cut later this month to help revive lending and temper recession.

Data from the National Statistics Board on Wednesday showed prices were flat on the month in May with food costs falling marginally by 0.1 percent. Non-food items were flat while services were up 0.1 percent.
The mid-range of a Reuters poll of analysts this week estimated annual inflation at 6.1 percent in May. The central bank targets a 2.5-4.5 percent rate in December and its end-2009 forecast stands at 4.4 percent.
Like most of its neighbours, Romania fell into recession this year as demand evaporated, lending came to a virtual standstill and foreign investors fled local markets amid global financial turmoil.

Analysts say Wednesday's data should point to a more aggressive stance by the central bank, which cut rates by 50 basis points in May.

"The figure confirms the disinflation trend and one can clearly see the impact of the significant contraction of demand," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.

"The figure means the central bank will cut rates more aggressively. The chances of a 50 basis points cut at the next meeting are high. The bank will afford one more rate cut after that, in August, but I think that will be the last one."

Romania's economy shrank 6.2 percent year-on-year in the first quarter. The market had expected a 2.5 percent contraction.

Rate cuts are made easier by the relative stability of the leu currency which has regained some ground after hitting record lows in January, thanks to a 20 billion euro foreign aid package secured by the Bucharest government in March.

The leu , weakened by the global financial crisis, had put upward pressure on consumer prices by raising the cost of imports and of the price of many services which are denominated in euros. (Reporting by Radu Marinas and Luiza Ilie; Editing by Mike Peacock)

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