Wednesday, January 13, 2010

Romanian Inflation Exceeds Central Bank’s Target

By Adam Brown

Jan. 12 (Bloomberg) -- Romania’s inflation rate was unchanged in December, surpassing the central bank’s target for a fourth year in 2009, as tobacco tax increases pushed up consumer prices, offsetting waning consumption.

The annual inflation rate was 4.7 percent, the same as in November, theNational Statistics Institute in Bucharest said in an e-mail today. The rate was in line with the median estimate in a Bloomberg survey of nine economists. On the month, consumer prices rose 0.3 percent.

Inflation above the target “is not really striking, but it could have a negative impact on the central bank’s credibility,” Vlad Muscalu, an economist at ING Bank Romania SA, said in an e-mail today. “The problems could amplify this year as the forecast path of inflation is optimistic and the central bank needs to continue” rate cuts.

Inflation has slowed in east Europe in the past year because of waning consumption, ebbing lending volumes and slower growth, or declines, in wages. Still, the Romanian central bank missed its target as it cut interest rates throughout the year to help counter an economic contraction.

Inflation Target

The Banca Nationala a Romaniei targeted inflation of between 2.5 percent and 4.5 percent at the end of 2009, from 6.3 percent at the end of 2008, as lower demand helped rein in consumer prices. The bank cut its main interest rate on Jan. 5 by a half-point to 7.5 percent. The rate was 10.25 percent at the start of last year.

The leu weakened 0.2 percent for the first time in three days to 4.1351 per euro as of 10:53 a.m. in Bucharest after the inflation data were released, while the Bucharest Stock Exchange’s main BET index fell 0.8 percent to 5133.49.

“The monetary policy easing cycle could continue at upcoming central bank meetings, although with more gradual cuts in the key rate,” Florin Eugen Sinca, an analyst at Banca Comerciala Romana SA in Bucharest, said in an e-mail today.

Romania’s economy contracted an annual 7.1 percent in the third quarter of 2009 after posting full-year growth of 7.1 percent in 2008, the fastest pace in the European Union. The government says the economy probably shrank 7 percent last year and will grow about 1.5 percent in 2010.

Tax Increase

A 30 percent increase in tobacco taxes, which took effect on Jan. 1, prompted cigarette makers to raise prices in steps in November and December, fuelling year-end inflation. In October, the inflation rate fell to a 27-month low of 4.3 percent. Tobacco, which increased 38.6 percent on the year in December, accounts for 4.6 percent of the basket of goods in the consumer price index.

The increase more than offset the effect of falling consumption, which slowed inflation every month between February and October. Without tobacco and alcohol, consumer prices rose 0.1 percent on the month in December.

In December, food prices rose an annual 3.3 percent as prices of non-food goods increased 7.7 percent and the cost of services advanced 6.9 percent, the institute said today.

Consumption in the third quarter declined 1.1 percent on the year, the institute said last month. Retail sales fell an annual 9 percent in November as lending and wage growth slowed.

To contact the reporter on this story: Adam Brown in Bucharest

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