Romania looks set for price stability for rest of year

BUCHAREST (Reuters) – Romanian inflation probably rose further above the central bank’s end-year target of 4-6 percent in June, but a narrow majority of analysts bet interest rates will stay on hold next month, a poll showed yesterday. The bank (BNR) hiked the key rate by 25 basis points to 8.75 percent in June to keep price pressures in check. But analysts say concerns that a more aggressive move might boost the leu may keep lending costs flat in the near term despite booming demand. The mid-range forecast of 10 analysts polled by Reuters put June annual price growth at 7.4 percent, up from May’s 7.3 percent. On the month, inflation was seen at 0.4 percent after 0.6 percent in the previous month. Official data are expected on July 11. «June inflation was driven by increases in railway transport prices and in phone services due to the leu exchange rate depreciation,» said Ionut Dumitru, head of research in Raiffeisen Bank in Bucharest. Romania slashed price growth to a post-communist low of 6.9 percent in April from more than 30 percent in 2001 to get in shape for European Union entry in 2007 or 2008. Inflation picked up again in May due to the hikes in indirect taxes on alcohol and tobacco with household spending staying high. Analysts expect consumer price growth to decelerate slightly later this year, though they say BNR’s target is out of reach this year and the 2007 goal is in danger as well. Split on rates The market remains split on whether more rate hikes will follow BNR’s move in June with eight out of 14 analysts betting on stable rates next month. The rest expect another 25 basis point increase. «The recent rate hike looks half-hearted. Probably there are people in the BNR board who continue to be concerned by speculative inflows,» said Radu Craciun, head of research at ABN Amro in Bucharest, who expects flat rates for the rest of 2006. BNR has raised the key rate by 125 basis points this year and drained excess liquidity from the banking system to curb inflation. But analysts said rates should go much higher if the bank wants to hit its 2007 inflation goal of 3-5 percent. «The central bank key policy rate needs to increase to 9.5 percent really fast if inflation was to reach the current target for 2007,» said Florin Citu, chief economist at ING Bucharest. BNR, which expects inflation to be within its target next year, next meets to assess policy settings on August 9. The bank narrowly missed its first ever inflation goal last year after loosening its policy to fight inflows of hot cash. The leu, which is up 2.7 percent versus the euro this year, has been under pressure in recent weeks due to growing global risk aversion.