Romanian inflation

BUCHAREST – Romanian annual inflation dropped sharply in the first weeks of the country’s European Union membership, hitting a lower-than-expected 4 percent in January from December’s 4.9 percent, data showed yesterday. Analysts said lower inflation was driven by a number of factors, including a strong currency, stable food prices, a cut in administered energy prices and possible impact from lower import prices after EU accession eliminated remaining customs duties. But inflationary pressures were likely to remain strong this year, they said, as the Black Sea state’s economy expands rapidly and Romanians demand higher wages. «It looks like a combination of factors,» said Iwona Pugacewicz-Kowalska, an economist at Citigroup in Poland. «It may be an EU-related effect because of lower import prices. I can’t rule out that inflation will continue to fall in coming months but there is no chance of it remaining this low for a long time.» Analysts are closely watching the impact of EU accession on inflation in Romania, which wants to join the eurozone in the next decade. When eight ex-communist countries joined the EU in 2004, several saw a spike in inflation, mainly due to sales tax hikes required by Brussels and a jump in food prices as free access to the EU-wide market boosted local producers’ pricing power. The effect was most pronounced in Poland, the biggest of the newcomers and a leading food producer in Eastern Europe. But Romania appeared to avoid a jump in inflation for now. «I do not see any impact from the EU, primarily because energy prices did not rise,» said Ionut Dumitru head of research at Raiffeisen Bank in Bucharest. Monetary impact Romania nearly halved its annual inflation rate last year, giving the central bank room to cut interest rates by 75 basis points to 8 percent last week. Some analysts said it was uncertain whether there would be further rate cuts in the near term regardless of any further falls in inflation, because policymakers were likely to keep real interest rates high to offset risks related to rising wage pressures. Others said last week’s monetary policy loosening was a sign central bankers remained concerned about currency appreciation even after coming under heavy criticism a year ago for weakening their anti-inflationary stance to keep the leu from rising. Analysts polled by Reuters had expected annual inflation to fall to 4.6 percent in January. «The fall in inflation is a justification for the rate cut,» said Lucy Bethell, emerging markets strategist at Royal Bank of Scotland in London. «Inflation risks will persist this year due to fiscal policy, credit growth. So the rate cut undermined the bank’s credibility. It was clearly aimed at weakening the currency.» Pugacewicz-Kowalska added that, according to her calculations, Romania’s annual core inflation rose in January, suggesting that price pressures remained strong throughout the emerging economy. The leu rose some 10 percent last year against the euro, driven by high foreign demand ahead of Romania’s EU entry.Yesterday, it traded slightly weaker on the day at 3.3900 per euro, and softer from January’s four-year high of 3.3368. Prices rose 0.2 percent month-on-month in January, with food prices up 0.3 percent, non-food prices decreasing by 0.2 percent and services prices rising by 1.4 percent, the National Statistics Board said.