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Thursday, June 26, 2008

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.

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