Romania expected to raise key rates today and next month

BUCHAREST (Reuters) – Romania’s central bank is widely expected to hike rates today and again in February to prevent a weakening leu currency from shattering its ambitious inflation target for the second year in a row. Twelve out of 13 analysts polled by Reuters see a rate hike of 50 basis points to 8 percent in January and one sees rates at 7.75 percent. Nine of them expect another hike in February. «We expect the central bank to defend its credibility by hiking the rate to 8 percent in January and delivering at least another 50 basis points tightening in the first quarter,» said Ciprian Dascalu, trader at Millennium Bank in Bucharest. «Risks (are) biased toward a more aggressive reaction if the leu remains under weakening pressure.» One of Europe’s best-performing currencies in the first half of last year, the leu has fallen steeply against the euro from a five-year high in the summer due to worries over the sustainability of Romania’s fast economic growth. Analysts expect the leu to remain emerging Europe’s punching bag this year. A shaky international environment highlights Romania’s ballooning current account gap and a lack of policy response to it. The poll’s mid-range forecast showed the central bank missing its 3-5 percent 2007 inflation goal by a wide margin. December inflation is forecast at 6.6 percent, from 6.7 percent a month before and compared with 4.9 percent in December 2006. Prices rose faster than expected last year mainly because drought helped to drive up food prices. Monthly inflation is seen up by 0.7 percent, from 0.9 percent in November, driven mainly by increases in fuel and thermal energy prices and the leu’s depreciation, which raises the cost of imported goods. The central bank is seen just meeting the upper end of this year’s 2.8-4.8 percent inflation goal because analysts expect a better farming year to reduce price growth by the end of the year from a peak of over 7.5 percent in the first half. But much depends on how far the government is prepared to act to support the anti-inflation drive ahead of a parliamentary election in the fall of 2008.