Friday, September 28, 2012

FT: Romania: central bank walking the growth v inflation tightrope

Romania’s central bank has opted to keep interest rates on hold despite rising price pressures, as the external and domestic economic outlook remains gloomy. But a hike could be on the cards for next year if inflation continues to oustrip target levels.

At a meeting on Thursday, the National Bank of Romania (BNR) stuck with its benchmark policy rate at 5.25 per cent, as analysts had expected.

In a statement, the bank said that “the further prudent monetary policy stance is also required by the uncertainty-ridden external environment which, together with domestic developments in the run-up to the elections [on December 9], could entail an abrupt heightening of the risks associated with the volatility of capital flows and of the exchange rate”.

These downside risks to the economy are seen as balancing the risk of rising inflation, which reached 3.88 per cent in August, driven partly by higher domestic food prices. But as the BNR noted, the 12-month consumer price growth rate to August was 2.8 per cent, not far off the EU average, while core inflation (omitting goods including fruit and vegetables) was 2.6 per cent, edging up from 2.3 per cent in July.

The BNR may not be able to keep rates on hold forever. The continued effect of food prices, plus pre-election spending, and increases in energy prices introduced at the IMF’s behest are likely to keep inflation on the upside for the remainder of the year and into 2013, according to Dumitru Dulgheru, head of fixed income research at BCR, Romania’s largest bank.

“Inflation has accelerated pretty fast recently, and risks are to the upside.” he told beyondbrics. “We will revise our initial 4 per cent forecast for the year to 4.4 per cent to 4.7 per cent.”

Dulgheru’s current forecast is for inflation of 4.5 per cent in 2013, which could force a rate hike in the first half of the year. This despite growth expected to come in at just 0.7 per cent for this year and a “meagre” 1.9 per cent next. The scope for monetary stimulus is clearly limited, as is that for fiscal loosening, with Romania’s public finances still very wobbly and dependent on international support.

The tension between Prime Minister Victor Ponta and President Traian Basescu makes life no easier for Romania. Whoever wins in December faces a number of thankless tasks, as the central bank implied in its statement:

The NBR is restating that the implementation of a balanced macroeconomic policy mix and of structural reforms, amid the fulfilment of commitments under the external financial arrangements with the European Union, the IMF and other international financial institutions, is essential to achieving price stability in the medium term as well as consolidating financial stability, both being prerequisites for lasting and sustainable economic growth.

Quite a challenge for the new administration.

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