Romanian central bank sees inflation on target despite risks

BUCHAREST – Romania’s central bank said yesterday it expected to meet inflation targets for this year and next despite a threat posed by high wage demands in the first year of the country’s European Union membership. Inflation is a key concern for the Black Sea state, which is struggling to cope with buoyant demand that is fueling a ballooning external deficit and feeds into higher consumer prices. Mugur Isarescu, the country’s central bank governor, said the bank expected year-on-year inflation to come in at 4.6 percent at the end of this year and 4.1 percent in December 2008, both within its target ranges of 3-5 percent and 2.8-4.8 percent respectively. «The baseline scenario of… medium-term macroeconomic developments shows a relative improvement in the outlook for inflation,» the bank said in its quarterly inflation report. It said moderating fuel and import prices and a strong leu should all work toward containing inflation, but several risks loomed. «The biggest risk is posed by excessive wage increases not correlated with productivity gains,» Isarescu said while presenting the report. Isarescu said high pay claims, fueled by fast economic growth and EU membership, were particularly worrying in the state sector, where the centrist government has already pledged to raise the wages of teachers, civil servants and judicial clerks. Risks lying ahead The bank slashed its benchmark rate by 75 basis points to 8 percent last Friday, citing declining inflation, which fell to a post-communist low of 4 percent in January. But several analysts warned the bank might be too preoccupied with the leu currency’s strength and be underestimating price risks ahead. The bank said that apart from pay demands, higher government spending, volatile oil and food prices and uncertainty about the exchange rate could also pose a risk to inflation targets. «Given that the currency has recently become an international asset, the future development in the exchange rate is fraught with uncertainties,» the report said. Some analysts and the International Monetary Fund say this year’s inflation target may be at risk and point out much of last year’s impressive inflation decline was made possible by a 10 percent gain in the leu currency. «It will not be easy at all to attain it. It looks like they took the optimistic approach for the inflation risks,» said Finansbank analyst Melania Hancila. «The leu’s fast firming late last year was not sustainable and had nothing to do with Romania’s export competitiveness.» Others say the current interest rate of 8 percent may be too low to compensate investors for economic risks, particularly the current account deficit. The deficit rose by 45 percent to -9.97 billion last year, an estimated equivalent of 10 percent of gross domestic product, and it is expected to widen to 12 percent this year, well above levels seen as sustainable over the long run.