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Wednesday, September 26, 2007

Romanian Central Bank Leaves Interest Rates Unchanged

Romania's central bank today left its key interest rate unchanged, after cutting it four times in previous meetings. The decision was taken as a the effects of an extensive drought and a weaker leu threaten to add to pre-existing inflationary pressures.

The National Bank of Romania decided to leave its Monetary Policy Rate at 7 percent at a board meeting in Bucharest today. According to the press statement

"The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices and the evolution of the leu exchange rate, given the difficulty of assessing the duration and effects of the recent world financial market turbulences..

The analysis of recent trends in macroeconomic indicators reveals a slowdown of the disinflation process and of the economic growth mainly due to supply-side factors (the impact of a prolonged drought on the farming sector) but also attributable to persistent domestic demand pressures. These pressures are also highlighted by the widening external imbalance.

Year-on-year inflation climbed to 4.96 percent in August, close to the upper limit of this year's target band, due to a significant increase of food prices and a correction of the leu's exchange rate against the background of recent turbulences on the world financial markets.

Wage dynamics have accelerated well above productivity growth, emphasizing the risks of deteriorating external competitiveness and of labour cost-related inflationary pressures. "

A drought that damaged two-thirds of Romania's crops this year hus pushed up food prices and a weakening of the leu during this month is making imports more expensive. The government also plans to increase spending, moving an eight-month budget surplus earlier this year into a full-year deficit of 2 percent of gross domestic product.

Romania's annual inflation rate rose to 5 percent in August, reaching the upper limit of the central bank's year-end annual inflation target of 4 percent, plus or minus a percentage point.

A weaker leu since mid-August has helped raise the prices of goods and services indexed to the dollar or the euro, including rents, telephone bills and gasoline. The leu has continued it's decline in September, bringing its loss against the euro since Aug. 1 to 6.6 percent and its drop against the dollar to 3.5 percent.

The International Monetary Fund warned last week that Romania's widening current-account gap makes the economy and the currency more vulnerable to external issues such as international investors' reluctance to place money in emerging markets amid the U.S. subprime crisis.

The current-account deficit widened to a record 9 billion euros ($12.6 billion) in the first seven months of this year from 4.9 billion euros in the same period last year as imports rose because of the stronger leu and the scrapping of many trade barriers when Romania joined the EU.


Emil Perhinschi said...

"The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices" ...

The BNR guys should probably warn the US Federal Reserve that the US food prices were affected by Rumanian drought too, since their food prices rose this year even more than ours.

When a Rumanian politician talks about [insert natural disaster here] and the need to have affordable food, think about "import licenses", and not "welfare". I wonder why they bother pretending ...

Acquisition level food prices did not grow much in the last 7 years ... 2000 ROL for 1kg potatoes in 2000, about 2500 ROL (0.25 RON) now ... If food prices would be up because of drought/floods/meteor strike/invasion of aliens, I would hear joyous singsongs from all around me. I am not hearing that, which means the prices are not growing, at least not there where they should grow if there was a scarcity of foodstuff.

I would look some place else for that tiny hike in prices of food in retail shops. Rumania has random weather troubles each year: it's either floods, or drought, or invasions of "mantis bureaucratica", most of the times at least two of them in the same time. Always, we hear the same story: we have to import potatoes from Egypt otherwise we're gonna starve. In the meantime, local crops get sold at production prices, if they get sold at all.

Edward Hugh said...

Hi again Emil,

First off thanks again for all these comments and your interest. Please keep them coming and lets maintain a dialogue. That makes things more interesting, and helps me get some perspective.

On the drought argument I have to admit I don't know much about the specifics of what has been happening in Romania, but there are two fairly general issues in the food markets right now:

1/ The move to biofuels. I posted about this in the Hungarian context, since the conversion of a lot of land for these purposes is pushing up grain prices everywhere. This is global.

Secondly, climate change. This is affecting a number of countries, and obviously may be to do with the drought in Romania. I looked at this in the Turkish context, and have a very long post on Turkey here, which may interest you since I look at Turkeys demographics, and they are very different from Romania's.

Basically weather anomalies present a challenge to economic management since they find expression in the volatility of food prices. Surface temperatures in Turkey have been running around 4˚C above the normal seasonal pattern so far this year, and average rainfall is running about 60% below the long-term mean. Such dramatic changes in climatic conditions are not just a local Turkish phenomenon, of course, but that does not make them any the less troublesome for the Turkish authorities. Thus the year-on-year rate of change in food prices has increased from 9.2% in July to 12.4% last month, largely because of a 1.9% monthly jump in unprocessed food prices which consequently pushed the annual inflation rate for this sub-category from 8.9% in July to 16.2% in August. Serhan Cevik argues that supply constraints stemming from climatic changes and higher exports to Europe (where adverse weather conditions have also lowered agricultural production) exert and will keep exerting an upward pressure on food prices inside Turkey, and thus on the CPI.

Anyway, at the end of the day I am only reporting all of this because this is the explanation from the Central Bank (ie it is the "officail version"). I still think remittances flows and labour shortages are the real area to watchm but no one at this point wants to know about these.

Since I have gone to some length here I may put this as a small post at some point.

If you are interested in economic matters you may enjoy my rather humourous post on the embarassment facing M Trichet at the present moment on Afoe.