Romanian Central Bank Raises Interest Rates Again In June

Romania's central bank raised its main interest rate (currently the European Union's highest) for a sixth consecutive meeting today and indicated it may rates again again as rising global fuel prices and soaring local wages stoke inflation.

The Banca Nationala a Romaniei raised its Monetary Policy Rate to 10 percent from 9.75 percent. The rate-setting board is ``ready to use the bank's entire array of instruments to counteract inflationary pressures and ensure disinflation will resume,'' the bank said in a statement.



The central bank today also left its minimum reserve requirement on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei. Monetary policy makers use the rate as a benchmark to drain excess cash from commercial banks through weekly auctions of one-month deposits and monthly auctions of three-month certificates of deposit to keep lending in check.

Romanian monetary policy makers, who have targeted an inflation rate of 3 percent in 2010 (inflation was running at 8.5 percent in May) have raised the main interest rate at every meeting since October, when it was 7 percent.



Inflation is being driven by food and fuel prices, a forex dominated lending boom, rising local wages, higher government spending and a weaker local currency.

The central bank is still targeting annual end-year inflation of between 3 percent and 5 percent for this year, and objective which currently seems unlikely to be attained.

Romanian producer-prices, which are normally regarded as an early predictor of inflation, rose at close to their fastest pace since 2004 in April as energy prices increased a weaker leu raised the cost of imported raw materials.

The cost of goods produced in factories and mines was up 15.5 percent in April over April 2007. This compares with a 15.6 percent rate in March, according to the latest data from the Bucharest-based National Statistics Institute. Prices rose 1.1 percent on the month, after rising 1.7 percent in March over February.






Economic growth this year may be as much as 8 percent, and may well be boosted by a good harvest this year following the drought which destroyed a third of Romania's crops in 2007. Gross domestic product grew an annual 8.2 percent in the first quarter, the second-fastest pace in the EU after Slovakia.




Romanian retail sales growth accelerated to the fastest pace in seven months in April as a lending boom and soaring wages continued to boost consumer spending. Sales rose an annual 26.6 percent, compared with 11.2 percent in March, according to the latest data from the Bucharest-based National Statistics Institute. Sales increased 15 percent on the month.




Growing consumer lending, rising wages and government spending are driving growth and are also key in boosting consumer prices, the central bank has said.

Romanian net wage growth, which the central bank says is a main driver of inflation, accelerated in April due to growing labour shortages. The average monthly net wage increased 24.8 percent from a year earlier to 1,282 lei ($546), the Bucharest-based National Statistics Institute said today. Growth accelerated from an annual 17.7 percent in March. On the month, wages increased by 7.6 percent. In real terms wages are up 16.2% year on year, since inflation in April was running at 8.6%.




Private debt in May increased an annual 61.3 percent, driven by increased competition among banks and rising net wages, which rose 25 percent on the year in April.

According to data from the Romanian central bank, household borrowing in euros continued to rise in March.


Total credit (including the coporate sector) was up by 66.3% year on year. Household borrowing in RON was up by 43% while household forex borrowing (mainly euros) was up a massive 140.3%. This latter number, large as it seems, was actually down slighly y-o-y from the 142.3 % registered in February and the peak 143.4% in January. The monthly rate of increase - 3.4% - was the lowest in at least a year, and again is well down from the 14.2% m-o-m peak hit in August 2007.






Government spending was up 39 percent in the first five months from a year earlier.

A weaker currency, which has declined more than 13 percent against the euro in the past year, has also made imports more expensive, along with gas, rent, telephone bills along with a number of other items traditionally indexed in euros in Romania and paid in lei.

Romania Inflation May 2008

Romania's inflation eased slightly in May to 8.5 percent but still exceeded market forecasts.



The Romanian central bank has raised rates by 275 basis points since October to bring the cost of borrowing to 9.75 percent. Bank officials accept inflation may well be running at around 6 percent at the end of this year, well above the 2.8-4.8 percent target.


Romania's economy grew a hefty 8.2 percent in the first quarter, compared with 6.1 percent in the same period in 2007. The growth beat expectations of a 6.4 percent increase during the period.



This has triggered warnings from central bankers about the economy possibly overheating as increased consumption and vast credit growth fuel a large expansion of the country's current account deficit. The current account deficit was at around 14 percent of GDP, last year, raising concerns about possible trouble financing it should foreign cash flows dry up.

The International Monetary Fund will revise upward Romania's economic growth forecast for this year, following strong first quarter GDP data, but said it was still expecting a slowdown in 2009. Romania's economy grew by a higher than expected 8.2 percent in the first quarter, fanning overheating concerns as the new European Union member also struggles with a ballooning current account gap and resurgent inflation. After April's annual consultations with authorities, the Fund came in with a 5.5 percent growth forecast for this year and a 4.7 percent estimate for 2009, compared to 6 percent in 2007.

It has said the potential slowdown could be caused partly by the knock-on effects of the global tensions. "The latest (growth) data were on the strong side, and the IMF team will revise up the projection of GDP growth for 2008, compared with the April visit,"

Central bank Governor Mugur Isarescu said at a seminar in Bucharest today that first-quarter growth is ``risky.''

``An economy growing this fast has vulnerabilities,'' Isarescu said. ``A high speed of growth means high risk. Among the vulnerabilities linked to this high speed of growth is the difficulty in transitioning from growth that generates imports to growth that generates exports.''

The trade deficit widened to 2.02 billion euros ($3.2 billion) in April, compared with 1.61 billion euros in the same month of last year, the Bucharest-based National Statistics Institute said on June 9.

The government predicted on May 14 that farm output will probably double this year from last year, when drought destroyed a third of Romania's crops, further boosting growth in the second half.

``It's very likely that, under conditions of a good farm harvest, growth will be well above the estimates from the beginning of the year,'' central bank Governor Mugur Isarescu said at a seminar in Bucharest today. ``A good harvest will add a billion euros ($1.5 billion) to economic growth.''

The current-account gap widened in the first quarter to 3.52 billion euros from 3.17 billion euros a year earlier. Fitch Ratings and Standard & Poor's have lowered their outlooks on Romania's credit rating, citing the gap.

Romania Retail Sales April 2008

Romanian retail sales growth accelerated to the fastest pace in seven months in April as a lending boom and soaring wages continued to boost consumer spending. Sales rose an annual 26.6 percent, compared with 11.2 percent in March, according to the latest data from the Bucharest-based National Statistics Institute. Sales increased 15 percent on the month.



Wage increases accelerated to an annual 25 percent in April sparked by foreign investment and labor shortages since Romania joined the European Union in 2007. A lending boom, fueled partly by competition among banks, has pushed up household debt more than an annual 60 percent and given Romanians more disposable income.

The services industry, including retail sales, added 4 percentage points to economic growth in the first quarter, the institute said yesterday. That's almost half the 8.2 percent pace of growth, which is now the second fastest in the European Union after Slovakia.

The retail sales data released today doesn't include car sales and isn't adjusted for any difference in the number of working days.


In a separate release INSSE said that industrial output was up year on year in April by 13.3%.




While construction output was up 31.4% year on year in April 2008.

Romania Wages and Salaries April 2008

Romanian net wage growth, which the central bank says is a main driver of inflation, accelerated in April due to growing labour shortages. The average monthly net wage increased 24.8 percent from a year earlier to 1,282 lei ($546), the Bucharest-based National Statistics Institute said today. Growth accelerated from an annual 17.7 percent in March. On the month, wages increased by 7.6 percent. In real terms wages are up 16.2% year on year, since inflation in April was running at 8.6%.



Romania's entry to the EU last year has sparked an increase in foreign investment in construction and manufacturing, raising demand for workers. Romania has had below replacement fertility for many years now, and in addition at least one million romanians (out of a labour force of about 12 million) are currently working abroad and sending home remittances (at least 500,000 are in Spain, and the same number are estimated to be in Italy. The World Bank estimated remittances to be running at 5.5% of GDP in 2007. In macro economic terms this is virtually equivalent to a 5.5% fiscal stimulus from the government, since the effect on domestic demand is effectively the same.

The central bank, which has raised interest rates at every meeting since October to 9.75 percent, the highest in the EU, has said wage growth threatens to further accelerate inflation, which was near a two-year high of 8.6 percent in April.

The jobless rate fell to 3.9 percent in April, from 5.2 percent when Romania joined the EU on Jan. 1 of last year. The Romanian Association of Construction Companies has said builders need another 300,000 workers just to stay on scheduled with current projects.

Romania Producer Price Growth April 2008

Romanian producer-prices, which are normally regarded as an early predictor of inflation, rose at close to their fastest pace since 2004 in April as energy prices increased a weaker leu raised the cost of imported raw materials.

The cost of goods produced in factories and mines was up 15.5 percent in April over April 2007. This compares with a 15.6 percent rate in March, according to the latest data from the Bucharest-based National Statistics Institute. Prices rose 1.1 percent on the month, after rising 1.7 percent in March over February.




Romania already has the European Union's highest interest rates, at 9.75 percent, after a pick-up in inflation to the fastest pace in two years led policy makers to raise borrowing costs at every monetary policy meeting since October. The central bank expects inflation to exceed its target for a second consecutive year in 2008.

The leu has weakened almost 10 percent against the euro over the past year, the second-worst performance in Europe behind the Icelandic krona, making imports of capital goods and raw materials more expensive.

Prices of manufactured goods increased an annual 17.7 percent in April, while prices in the mining and drilling industries rose 13.2 percent. The costs of electricity, natural gas and water rose an average of 2.9 percent, the statistics institute said.

Consumer-price growth in April remained at a two-year high of 8.6 percent from an annual 8 percent in February.

Romania GDP Q1 2008 (Preliminary)

Romania's economic growth accelerated more than economists expected in the first quarter of 2008 as credit growth and rising wages boosted consumption, threatening to push up inflation even further.

Gross domestic product grew at an annual rate of 8.2 percent in the first quarter, the fastest pace since the third quarter of 2006, according to the latest data from the Bucharest-based National Statistics Institute. This compares with 6.6 percentrate in the fourth quarter of 2007.




The rate of growth in the Romanian economy - which is the second-fastest after the 8.6% achieved in Slovakia among the 20 European Union members that have so far released first-quarter reports, may well drive up inflation even further despite the best monetary policy efforts of the central bank. Consumer prices rose a two-year high annual 8.6 percent in April.




The central bank, which raised its main interest rate five times since October, has warned that inflation may not slow until the third quarter.The Banca Nationala a Romaniei has raised its Monetary Policy Rate to 9.75 percent currently from 7 percent eight months ago and next meets to decide on the rate on June 26.



The leu gained as much as 0.8 percent to 3.5984 per euro, the strongest since April 29, and was at 3.6024 at 11:29 a.m. in Bucharest, from 3.6257 on May 30.

First quarter was described last month as "the best for the Romanian economy in modern history'' by Finance Minister Varujan Vosganian who attributed the phenomenon to rising wages, increased tax collection and growing foreign investment.

Net wages grew at an annual rate of nearly 18 percent in March while household debt has been surging at around 64 percent year on year.

In April 2008 non-government credit in Romania was up by 2.5 percent from March (or 2.0 percent in real terms), and reached RON 168,734.1 million according to the latest data from the national bank. RON-denominated loans were up 3.4 percent (2.8 percent in real terms) and foreign currency-denominated loans rose by 1.8 percent when expressed in RON and by 3.2 percent when expressed in EUR.

At end-April 2008, non-government credit was up year on year by 64.4 percent, or 51.4 percent in real terms, on the back of the 44.5 percent increase in RON-denominated loans (33.0 percent in real terms) and the 85.8 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 68.2 percent).





RON denominated household credit was up by 42% year on year in April, while household foreign currency-denominated loans were up at an annual rate of 137.7%. The rate of increase in these latter has slowed a little in recenent months from the peak, so the whole process may now be slowing. We will have to wait and see.


Romania's unemployment rate fell in April as farmers and construction companies boosted seasonal hiring because of favorable weather conditions. The unemployment rate fell to 3.9 percent in April from 4.2 percent in March, according to data from the National Labor Agency. Unemployment fell from 4.5 percent a year earlier.





Romania's jobless rate has been falling steadily since last year when it joined the European Union, increasing investment in the nation of 22 million and allowing many Romanians to emigrate to find better-paying jobs in other EU nations such as Italy and Spain. A growing labor shortage and a booming construction industry has helped boost average net monthly wages in Romania by an annual 17.7 percent in March.



Retail sales expanded 11.2 percent from a year earlier, government tax collection rose 44 percent on the year, the construction sector grew 32 percent and increasing job offers lowered unemployment to 3.9 percent.




Vosganian also indicated that the government expects a large agricultural harvest this year, which may further accelerate growth. A drought last year destroyed a third of Romania's crops, shaving more than a percentage point off GDP growth last year, according to government estimates. Romania's statistics institute will provide a detailed breakdown of first quarter economic growth on June 5.