Inflation in Romania Goes Beyond NBR's Worst Expectations

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Inflation in Romania Goes Beyond NBR's Worst Expectations

Romania's annual inflation rate soared to 8.63% in March, the highest since December 2005, according to the National Statistics Institute data.

NBR forecast inflation at 8.3% in March, which should have been this year's peak. However, the figure released yesterday was worse than analysts had expected - 8.5% for March, Ziarul Financiar reports.

Under the circumstances, some market analysts now expect inflation to pick up speed over the coming months, which would also induce the need to continue to tighten the monetary policy. NBR will debate the key interest on RON during the meeting scheduled for May 6, and will also approve the first-quarter inflationary report, which will include an updated 24-month forecast.

Prices rose by 0.67% in March after a 0.7% jump the month before. Growth drivers were fruit, especially citrus fruit, whose prices rose by almost 6.8%, as well as vegetable oil. The price of vegetable oil went up by 3.9% in March alone, which took the cumulated price hike to 5.5% since the end of last year. Energy prices stagnated, given that no adjustments were operated, after natural gas had become 8.4% more expensive in February.

Service prices also increased in March, especially transport and telecommunications where hikes came close to 2%. The trend was influenced by the depreciation of the RON in March, given that many prices are based on the euro.

The inflationary outburst in March came amid an unfavourable international context. Grain prices continued to increase worldwide, and the price per oil barrel reached an all time high. After the RON lost about 2% against the euro in March, the rise in prices on foreign markets had even worse implications on the domestic market.

Following the surprise surge in March, analysts have different views on the inflationary trend.

"Looking ahead, the likelihood of a fiscal slippage before elections, supply-side shocks, and deterioration of inflationary expectations are the main risk factors concerning inflation," says Ilker Domac, Citibank analyst who monitors the trend of the Romanian economy.

He expects the NBR to increase the key rate on RON by at least half a percentage point to 10% this year, to bring inflation back to the scheduled interval. Citibank's analyst sees 2008 inflation at 6.85%, compared with 6.6%, but notes that the forecast may be revised in case of unexpected exchange rate developments, given that such fluctuations are quick to show in prices.

However, local analysts do not see eye to eye on the inflationary outlook.

Lucian Anghel, NBR's chief economist, believes inflation reached its peak in March and that NBR will no longer operate any raises to the monetary policy rate, after it increased the level from 7% per annum last October to the present rate of 9.5%.

Florin Citu, head of ING Bank's treasury believes that inflation could continue to escalate, which would force the NBR to raise the momentary policy rate. "The problem here is that the base inflation has gone up a lot. It is hard to drive it down without new restrictions on the monetary policy. It is now more likely that the monetary policy rate will go up beyond 10%." Catu was quoted as saying by Mediafax.

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