Tuesday, February 7, 2012

Romanian Central Bank Raises 2012 Inflation Forecast to 3.2%

Romania’s central bank raised its 2012 inflation forecast and pledged to act against currency volatility stemming from the resignation of the government.

The bank sees consumer-price growth at 3.2 percent, still within its target range, compared with a November forecast of 3 percent, Governor Mugur Isarescu said in a news conference in Bucharest today. The inflation rate will drop to 3 percent in 2013, he said.

“Weak domestic demand enables us to forecast that the inflation rate will remain well within the target band, but the very good harvest from last year will have a less favorable impact on inflation this year if it’s a normal agricultural year,” Isarescu said.

The Bucharest-based Banca Nationala a Romaniei cut its benchmark interest rate for a third meeting by a quarter-point to a record-low 5.5 percent on Feb. 2 to support an economic recovery amid Europe’s debt crisis and slowing inflation. Rates are being lowered “in small steps to keep from harming the equilibrium.”
Target Met

The leu dropped 0.1 percent to 4.3490 per euro as of 1:44 p.m. in Bucharest. The Romanian currency has lost 0.5 percent against the euro so far this year, compared with gains of 7.2 percent for the Hungarian forint, 6.6 percent for Poland’s zloty and 2.2 percent for the Czech koruna in the same period.

The bank met its inflation target for the first time in five years in 2011 with the rate falling to a record low of 3.14 percent in December. The target range for this year is the same as last year at between 2 percent and 4 percent.

Prime Minister Emil Boc resigned yesterday, one day after an International Monetary Fund mission ended a review of the country’s bailout loan program, following public wage cuts and tax increases prompted countrywide and sometimes violent protests. President Traian Basescu nominated Mihai-Razvan Ungureanu to form a government and get approval from lawmakers.

“Any major political change is a stress factor for the markets and these factors must be managed,” Isarescu said. “We don’t see now visible elements of stress in the markets.”

Asked whether the central bank will take measures to prevent volatility, Isarescu answered “of course.”
Deregulation Deadlines

Boc’s government negotiated new deregulation deadlines for household electricity prices until 2017 from the previous 2015 during a two-week program review by the IMF and the European Union, which ended Feb. 5. The government had planned to start negotiating new deadlines for natural-gas price liberalization in April.

“At this stage, we see a reduced impact on the inflation rate stemming from administered price increases, but we might still see price changes when the government resumes talks in April,” Isarescu said.

The central bank can’t reduce minimum reserve requirements on foreign-exchange and leu deposits as “some banks have excessive liquidity,” Isarescu said. The bank left the requirements unchanged at 20 percent for foreign-exchange deposits and 15 percent for leu deposits.

The country secured a 5 billion-euro ($6.6 billion) precautionary accord from the IMF and the EU to reassure investors it will keep a fiscal discipline ahead of local and general elections this year. It doesn’t plan to draw on the money set aside by the lenders.

The ruling coalition pledged to lower the budget deficit to 1.9 percent of gross domestic product this year from 4.4 percent in 2011 to avoid possible financing issues stemming from market turmoil.

The international lenders lowered Romania’s economic-growth forecast for this year to between 1.5 percent and 2 percent from a previous outlook of between 1.8 percent and 2.3 percent on slowing exports to western Europe, the country’s major trading partner.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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