Wednesday, January 12, 2011

Romania 2010 Inflation Quickens to 8%, Tops Central Bank Target

Romania’s inflation rate rose to the highest in more than two years, exceeding the central bank’s target for the fourth consecutive year, as a 5 percentage-point increase in a consumption tax in July boosted prices throughout the economy.

The rate advanced to 8 percent in December, matching the highest since August 2008, from 7.7 percent in November, the Bucharest-based National Statistics Institute said today in an e-mail. On the month, prices rose 0.5 percent. The rate was below a central bank’s year-end forecast of 8.2 percent published in November. The bank sees the inflation rate falling to 3.4 percent by the end of this year, as the effects of the tax increase wane.

Romania, which turned to international lenders for a bailout in 2009 after a recession eroded budget revenue and put pressure on the currency, raised the value-added tax to 24 percent in July to meet a budget-deficit target of 6.8 percent of economic output in 2010 and 4.4 percent this year. It got a 20 billion-euro ($26 billion) bailout from the International Monetary Fundand the European Union.

“Adverse foreign-exchange and food-price shocks are the key risks to the inflation outlook for 2011,” Citigroup Inc. economists Ilker Domac and Gultekin Isiklar wrote in a note today before the inflation report. “With these risks in mind, we think the large negative output gap is likely to contain inflationary pressures.”

Inflation Target

The Banca Nationala a Romaniei targeted inflation of between 2.5 percent and 4.5 percent at the end of 2010, from 4.7 percent at the end of 2009, as plunging consumption helped rein in consumer prices. The bank kept its main interest rate unchanged at a record-low 6.25 percent on Jan. 5, as policy makers maintained a prudent stance to bring inflation back to its medium-term target.

Food-price inflation accelerated to an annual 6.5 percent in December compared with 6 percent in November, the institute said. Prices for services rose an annual 6.4 percent compared with 6.1 percent and non-food prices gained 9.8 percent, compared with 9.7 percent the previous month.

Romania’s economy shrank 2.5 percent on the year in the third quarter of last year, posting the second-worst contraction in the European Union after Greece, as the government’s tax increase and a 25 percent reduction in public wages last year choked demand.

The economy will probably return to growth this year led by exports and industrial output gains, after posting a 2 percent contraction in 2010, according to forecasts from the IMF and the government.

The Balkan nation’s industrial production growth accelerated in November to an annual 4 percent from 2 percent in October on increased demand from western Europe for the country’s manufactured goods, such as cars, textiles, chemicals and steel products, the institute said in a separate statement. On the month, industrial production rose 1.6 percent in November.

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

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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