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Monday, April 14, 2008

Romania Inflation March 2008

Romanian inflation accelerated in March to the fastest pace in more than two years as a weaker leu boosted the cost of services and imports and rising wages and lending spurred consumption. The annual inflation rate rose to 8.6 percent, the highest since January 2006, from 8 percent in February, according to data from the Bucharest-based National Statistics Institute this morning. Consumer prices rose 0.7 percent in the month, the same pace as in February.

Food prices, affected by a drought that destroyed one-third of Romania's crops last harvest, rose an annual 10.8 percent in March. Service costs, the most directly affected by a weaker local currency, increased 10.7 percent, the institute said. Prices of non-food goods rose an annual 5.9 percent.

The leu has fallen 15 percent against the euro since August which also puts some upward price pressure on imported products, although it does make Romanias exports cheaper, something which is badly needed given the ongoing trade and current account deficits.

These increases could well trigger well trigger yet another interest rate hike when the central bank next meets on May 6.

The central bank increased its Monetary Policy Rate half a percentage point to 9.5 percent last month, saying that inflation wouldn't likely slow until mid-year. The bank has now raised the key rate at its last four meetings (starting last October, when the rate was 7 percent). Romania's central bank has consistently highlighted wage growth as a main driver of inflation and the main threat to this year's inflation forecast. The difficulty is that further increasing the policy rate may simply drive more people to take out euro denominated loans at the cheaper interest rates which are associated with them.

The central bank missed its 2007 inflation target of 4 percent, plus or minus one percentage point, as consumer prices surged an annual 6.6 percent. The bank, which targets inflation of between 3 percent and 5 percent this year, has predicted year-end inflation of 5.9 percent.

Central bank Governor Mugur Isarescu also said last week that rising wages, which increased an annual 20.5 percent in February, risk sparking a ``second round'' of price increases in coming months. Household debt also rose an annual 66 percent in February amid a lending boom, giving citizens more disposable cash.

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