This slowdown in inflation may, however, be only a temporary respite before rapidly rising consumer borrowing and consumption once more boosts the annual rate in the first quarter of 2008. The central bank raised its benchmark interest rate to 8 percent from 7.5 percent on Jan. 7, citing inflation concerns and it is widely expected that policy makers will lift the rate again next month to what will be the highest in the European Union.
Growth of food prices, the main component of the consumer price index, eased to an annual 9.1 percent in December from 9.4 percent in November. A drought last year destroyed a third of Romania's crops and damaged a further third, pushing up food prices and driving the inflation rate to 6.8 percent in October from a 17-year low of 3.7 percent in March.
The increase in prices of non-food goods slowed to 3.6 percent in December from 4.1 percent in November but services prices were up, to 8.6 percent from 7.3 percent in October.
Thecentral bank, which targeted end-year inflation of 4 percent plus or minus 1 percentage point, said in a statement on Jan. 7 that consumption is at an ``unsustainable level in the context of rapid expansion of credit to the private sector, especially of foreign currency loans.''
The bank has also drawn attention to government spending ahead of November parliamentary elections, a consumer borrowing boom and rising wages as being the main inflation threats in 2008.
The government has promised to increase spending on infrastructure and social areas in 2008, widening its targeted budget deficit to 2.7 percent of gross domestic product from its estimated deficit of less than 2.4 percent of GDP for 2007, againts IMF advice to move towards a budget surplus in an attempt to drain excess liquidity from the economy.
Average net wage increases of an annual 23.5 percent in November and an annual 55 percent rise in private borrowing is also increasing consumption, further pressuring consumer prices, the central bank said.
Further declines in the leu could also pressure inflation this year, and the leu has declined more than 13 percent against the euro since the beginning of August as Romania's current-account deficit widened to a record and international investors grew reluctant to invest in some markets perceived as carrying a higher risk.
Basically the current account deficit is being sustained at the present time by the increasing foreign currency borrowing by Romanian citizens. Whent his stops, this whole process may well come grinding to a halt.
The current-account gap in the first 10 months of 2007 widened to 13.35 billion euros ($19.7 billion) from 7.75 billion euros a year earlier. Much of the deficit was created by a surge in imports as the leu's gain made goods cheaper for Romanians and the country eliminated import barriers as it joined the EU.
Standard & Poor's in November lowered its outlook on Romania's sovereign credit rating for a second time since April, citing the widening current-account deficit, the broadest measure of the trade in goods and services. That gap widened to a record
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