Friday, August 6, 2010

Romania Central Bank's Isarescu Raises Year-End Inflation Estimate to 7.8%


By Irina Savu - Aug 6, 2010


Romania’s central bank raised its inflation forecast for 2010 and 2011 after an increase in the value-added tax to meet international bailout conditions boosted prices.

The bank estimates the 2010 year-end inflation at 7.8 percent, compared with a May forecast of 3.7 percent, Banca Nationala a Romaniei Governor Mugur Isarescu said in Bucharest today. The rate may be 3.1 percent in December 2011, compared with a previous estimate of 2.8 percent, it said.

“We are extremely vigilant as far as the second-round effects from the VAT increase are concerned,’’ Isarescu said. “We hope to win this muddy war with inflation.’’

The bank left the monetary policy rate unchanged at a record-low 6.25 on Aug. 4 for a second meeting in a row as policy makers assess the impact of the VAT increase on inflation. The central bank’s target is 3 percent plus or minus 1 percentage point this year.

The government, which relies on a 20 billion-euro ($26.5 billion) loan from the International Monetary Fund and the European Union to stay afloat, increased the value-added tax to 24 percent from 19 percent and cut public wages by 25 percent last month to meet the bailout conditions.

Isarescu sees no reason to adjust the benchmark rate based on the tax increase, because the expected acceleration in inflation “isn’t monetary,” he said on July 8. Policy makers halted rate reductions on June 30 after cutting rates four times in a row to combat recession.

Main Target

The inflation rate, the central bank’s main target, was unchanged at 4.4 percent in June. A drop in food prices offset a weaker currency that drove up the import costs.

Isarescu also said he “discourages” any appreciation of the leu. He said the central bank was “flexible” as far as banks’ minimum reserve requirements are concerned and is ready to “move” on the issue “when the market asks for it.” He said lenders showed they have liquidity by buying 1.2 billion euros in Treasury bills sold by the Finance Ministry last month.

The east European country’s economy, going through its worst recession in 60 years, will probably contract as much as 1.9 percent in 2010, more than the previous forecast of 0.5 percent, because of an expected slump in demand after the VAT increase and wage cuts, Jeffrey Franks, head of the IMF mission to Romania, said on Aug. 4. The economy will return to growth of 2 percent next year, he said.

Romania is meeting loan conditions and the donors will recommend the release of a total 2.1 billion euros in next payments in September, Franks and European Commission Mission Head Laurent Moulin said.

Isarescu said the country must “rediscuss” the 2015 target for euro adoption, clarifying earlier remarks that the country’s convergence program must be discussed again.

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.

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