Friday, October 11, 2013

Romanian Inflation Slowdown Strengthens Case for More Rate Cuts

Bloomberg News

By Andra Timu and Irina Savu 
October 10, 2013

Romanian inflation slowed more than analysts estimated in September, strengthening the case for more interest-rate cuts from a record low.

The inflation rate dropped to 1.9 percent, from 3.7 percent in August, the Bucharest-based National Statistics Institute said today. The median estimate of nine economists surveyed by Bloomberg was 2.3 percent. The rate was also below the central bank’s end-September forecast of 3 percent. Prices declined 0.6 percent from the previous month.

The Banca Nationala a Romaniei lowered its key rate to a record-low 4.25 percent on Sept. 30, the third reduction in as many meetings. Slowing consumer-price growth persuaded policy makers to resume lowering borrowing costs after pausing for more than a year. The September inflation rate was within the bank’s 2013 target range of 1.5 percent to 3.5 percent for the first time since July 2012.

“The disinflationary process continues at a pace above that taken into account by the central bank,” economists at Raiffeisen Bank Romania SA, including Ionut Dumitru, wrote in an e-mailed note today. “In the context of declining inflation expectations and weak domestic demand, we expect policy makers to increase the pace of the easing cycle.”

The leu was little changed at 4.4602 against the euro at 1:03 p.m. in Bucharest. It has weakened 0.3 percent versus the euro this year, the second-best performance among 23 emerging-market currencies tracked by Bloomberg.
Easing Cycle

The likelihood of a 50 basis-point rate cut in November has “increased considerably,” the economists at Raiffeisen said. They predict that the easing cycle will end at 3.5 percent in January.

Food prices declined 1.7 percent in September from a year earlier after the government cut the value-added tax for bread to 9 percent from 24 percent and a bumper harvest pushed prices down. The inflation rate for non-food items also dropped to 4.38 percent from 5 percent in August, the institute said.

The increase in service prices was unchanged at 3.2 percent in September, according to the statement.

Today’s data “open the door for new record lows in inflation during the first half of 2014 and maybe even more rate cuts than currently considered,” Vlad Muscalu, a Bucharest-based economist at ING Bank Romania SA, wrote in an e-mailed note.

ING forecasts another 50 basis points of rate reductions to 3.75 percent.

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 editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net

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