Monday, February 8, 2010

Romanian Central Bank Raises 2010 Inflation Forecast on Tobacco

By Irina Savu and Adam Brown

Feb. 3 (Bloomberg) -- Romania’s central bank raised its inflation forecast for 2010 after a tobacco tax increase prompted a “very high” annual rate in January.

Year-end inflation may be 3.6 percent, rather than a previous forecast of 2.6 percent, Banca Nationala a Romaniei Governor Mugur Isarescu told reporters in Bucharest today.

“January inflation will prove to be higher than expected and that will affect the consumer price index for the entire year,” Isarescu said. “2011 inflation will no longer be affected by the tobacco tax increases.”

Policy makers this week cut the benchmark interest rate to 7 percent from 7.5 percent after the nation’s credit rating outlook was raised and optimism increased that its bailout will be resumed. The International Monetary Fund, which leads the 20 billion-euro ($28 billion) loan for Romania, predicts 1.3 percent economic growth this year will add inflation pressure.

The inflation rate was 4.7 percent at the end of last year, when the economy contracted about 7 percent. Early tobacco price increases pushed the rate above the 4.5 percent target agreed with the IMF. The central bank targets inflation of between 2.5 percent and 4.5 percent this year and between 2 percent and 4 percent in 2011.

The price of tobacco, which accounts for 4.6 percent of the basket of goods in the index, rose 38.6 percent on the year in December and was expected to rise faster in January.

Leu Effect

Depreciation pressure will lesson on the leu this year as government measures improve investor sentiment, Isarescu said at the same press conference. The currency was little changed at 4.1375 to the euro as of 11:40 a.m. in Bucharest. It rallied this week to its strongest in more than a year, and has gained 2.9 percent this year.

Fitch Ratings on Feb. 2 raised its credit rating outlook on Romania and Standard & Poor’s said it may do the same after the IMF signaled it will unlock the country’s bailout loan.

The Washington-based lender froze the loan last November after the government collapsed amid infighting. A fund mission last month recommended resumption of the loan after Prime Minister Emil Boc put together a Cabinet on Dec. 23 and lawmakers on Jan. 14 approved the spending and revenue plan that seeks to narrow the 2010 gap to 5.9 percent of gross domestic product from an estimated gap of 7.3 percent last year.

Isarescu warned, that of a “great danger in the coming period of a state of euphoria” as the economy resumes growth.

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