Romania's Central Bank Raises Interest Rates

Romania's central bank raised its main interest rate, the European Union's highest, again today to 10.25 percent. The Banca Nationala a Romaniei raised the rate for the seventh consecutive policy meeting as it expects inflation to have accelerated in July from June's two-year high.



A drought last year destroyed a third of Romania's crops, adding to pressure from increasing global food prices and boosting inflation from a 17-year-low of 3.7 percent in March, 2007. The bank has now raised the key rate in stages from 7%.

The leu strengthened as much as 0.4 percent to 3.5138 to the euro after the announcement, from 3.5276 at closing yesterday. The benchmark BET stock index was little changed at 6045.04.


The central bank had previously predicted inflation may slow as early as August as an expected bumper crop counters rising food prices. Central banks in emerging economies, including Brazil, Russia and Turkey raised interest rates this month to stem the effects of surging oil and food prices. The European Central bank on July 3 raised its benchmark lending rate by a quarter point to 4.25 percent, the highest in seven years.

Several east European central banks, including monetary policy makers in Poland and Serbia, are taking stock of their moves to see if they hit their intended target. Slovakia held its main rate on Tuesday and the Czech Republic is expected to do the same next Thursday.

Romania's annual net-wage growth of 23.3 percent in May and a 63.4 percent increase in private lending in June have also pressured prices and boosted economic growth.

Construction and Forex Lending Still Booming In Romania

Romanians were awarded 6 percent more homebuilding permits in June than in June 2007 as higher wages and a lending boom continued to drive construction activity. The government issued 6,137 homebuilding permits last month, compared with 5,791 in June 2007, according to the latest data from the National Statistics Institute. Month on month permits awarded were down 2.4 percent from May.

Rising wages, a lending boom and growth in real estate prices have given Romanians more money to invest in housing. Wages increased an annual 23.3 percent in May:



Bank lending continued to drive up debt - both corporate and household - at a very fast annual rate again in June, according to the latest data from the Romanian central bank.

In June 2008, totat non-government credit grew 3.7 percent, or 3.4 percent in real terms, from May 2008 to reach RON 178,180.2 million. RON-denominated loans went up 2.1 percent (1.8 percent in real terms) and foreign currency-denominated loans rose by 5.0 percent when expressed in RON and by 4.3 percent when expressed in EUR.

At end-June 2008, total non-government credit was up year on year by 63.4 percent, or 50.5 percent in real terms, on the back of the 40.0 percent increase in RON-denominated loans (28.9 percent in real terms) and the 89.3 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 62.7 percent).



Romania's construction industry, including commercial and engineering works, expanded an annual 34 percent in May, the fastest pace in the EU, the institute said on July 4.

Romania's Current Account Deficit Widens in May 2008

Romania's current-account deficit widened in the first five months of the year as rising wages and a lending boom encouraged citizens to buy more imported goods. The gap widened to 6.53 billion euros ($10 billion) from 5.88 billion euros in the same period of last year, according to the Bucharest-based Banca Nationala a Romaniei earlier today.

A lending boom, which saw private debt shoot up by more than an annual 61 percent in May, and annual net wage increases of 23.3 percent in that month encouraged Romanians to buy more imports, widening the trade and current-account gaps.

The European Union has warned Romania to narrow the gaps or risk instability of the local currency because of global economic uncertainty. Fitch Ratings and Standard & Poor's have lowered their outlooks on Romania's credit rating, citing the deficits.

The trade deficit, the main component of the current-account gap, widened to 6.9 billion euros in the first five months of the year from 6 billion euros a year earlier, the National Statistics Institute said on June 9.

Net money transfers to Romania, mainly from the estimated 2 million citizens living abroad, increased to 2.25 billion euros in the first five months from 1.88 billion euros a year earlier, the central bank said today.

The services component of the gap, including tourism and transportation, saw a net inflow of 194 million euros, from an inflow of 422 million euros a year earlier.

Foreign direct investment in the first five months totaled 4.1 billion euros, compared with 2.1 billion euros in the same period of last year, the bank said.

Romania Inflation Rises Again in June 2008

Romania's inflation rate rose in June, and pushed back up the two-year high reached in June. Inflation accelerated to 8.6 percent from 8.5 percent in May according to data last week fromthe Bucharest-based National Statistics Institute. On the month, prices rose 0.3 percent, compared with 0.5 percent in May.



Inflation has now accelerated from a post-communist low of 3.7 percent in March 2007 and the central bank has raised the main interest rate at every policy meeting since October - to the current level of 10 percent, the highest in the European Union. The bank, which next meets on July 31, has forecast inflation will slow starting in August.




Food prices are accelerating worldwide, pushing up inflation particularly in eastern Europe and other emerging markets, where people spend a larger portion of their income on food. Latvian inflation was 17.7 percent in June and Ukraine's was 29.3 percent.

Food prices in Romania were up 11.8 percent year on year while non-food items rose 5.9 percent. Services rose an annual 8.7 percent. And the immediate future looks non too promising on the inflation front, since gas prices are about to rise 12.5 percent and electricity prices 5.3 percent effective July 1. The government has also just raised the tobacco tax to 50 euros per 1,000 cigarettes from 41.5 euros.


However there are some positive trends, agriculture, for example. Farm output will probably double this year over 2007 due to better weather and increasing investment. Agriculture accounted for 9.4 percent of all investment in the first quarter, compared with 1.5 percent in Q1 2007.

Romanian Wages Rise 23.3% in May 2008

Romanian net wages grew an annual 23.3 percent in May as increasing labor shortage lead to higher salaries and increased investment raised demand for workers. The average net monthly wage rose to 1,248 lei ($539), according to today's data from the Bucharest-based National Statistics Institute. The rate of increase was close to the 24.8 percent annual increase registered in April.



Romania's entry to the European Union 18 months ago sparked an increase in labor migration to western Europe, particularly to Spain and Italy, aggravating difficulties which were inevitably going to arise from the long term below replacement fertility the country has experienced. At the same time a boom in consumption and construction fuelled in part by remittances these very same migrant workers sent home has boosted demand for workers who just aren't available.



The Banca Nationala a Romaniei said wage growth is a main factor in inflation and is encouraging a lending boom as citizens' borrowing power expands. The central bank has increased its main interest rate at every meeting since October to slow inflation, which was close to the fastest pace in two years in May, at 8.5 percent.

Romanian unemployment fell to 3.8 percent in May, from the 5.2 percent level which prevailed when Romania joined the EU. The Romanian Association of Construction Companies has said builders need another 300,000 workers simply to stay on schedule with current projects.

Romania Construction Output May 2008

Romania's construction industry, which is currently the fastest-growing in the European Union, gathered additional steam in May as investors built offices and shops and rising wages spurred homebuilding. The value of construction works rose an annual 34 percent in May, compared with 31 percent in April according to data released by the National Statistics Institute this morning. Construction output was up 10.5 percent month on month.



Homebuilding jumped an annual 36 percent in May as rising wages and a lending boom encouraged Romanians to invest more in residential property. Net wages rose 25 percent on the year in April.




Private debt grew by 61 percent in May, the central bank said on June 24.



Construction in the first quarter contributed strongly to a year on year economic growth rate of 8.2 percent pace, the second-fastest in the EU after Slovakia. Construction accounted for 1.5 percentage points of the growth.

Romania Producer Prices April 2008

Romanian producer prices rose at the fastest annual pace since November 2004 in April as rising energy prices and a weaker local currency increased the cost of imported materials. The cost of goods leaving Romanias factories and mines rose at an annual 16.8 percent rate in May, compared with 15.5 percent in April, according to dat from the National Statistics Institute today. Prices rose 1.7 percent on the month, after a gain of 1.1 percent in April.

The leu has weakened almost 15 percent against the euro in the past year, making imports of capital goods and raw materials more expensive. Higher global energy prices also increased costs for producers. Producer-price growth is an early indicator of inflation, which in May was 8.5 percent, more than twice the pace of the euro region.

Prices of manufactured goods rose an annual 19.6 percent in May, compared with 17.7 percent in April, while price growth in the mining and drilling industries slowed to 11 percent from 13.2 percent. The costs of electricity, natural gas and water rose an average of 3 percent, compared with 2.9 percent in April, the statistics institute said.

In another indication of the growing stresses and strains which are now accumulating in the Romanian economy, we learnt today that overdue private debt almost doubled in April from a year earlier as the local currency weakened, making loans in euros more expensive to repay. Loan payments that are more than 30 days overdue rose to 691 million lei ($300 million) in April from 380 million lei a year earlier, according to the Banca Nationala a Romaniei.

Private debt in Romania rose an annual 61.3 percent in May from a year earlier in a lending boom spurred by rising wages and competition among banks, the central bank said on June 24. Borrowing in euros accounted for most of the lending.



In May 2008, non-government credit grew 1.8 percent, or 1.3 percent in real terms, versus April 2008 to RON 171,834.3 million. RON-denominated loans went up 2.4 percent (1.9 percent in real terms) and foreign currency-denominated loans rose by 1.4 percent when expressed in RON and by 2.9 percent when expressed in EUR. At end-May 2008, non-government credit climbed year on year by 61.3 percent, or 48.8 percent in real terms, on the back of the 41.7 percent increase in RON-denominated loans (30.6 percent in real terms) and the 82.6 percent advance in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 65.0 percent).

If we look at the annual rates of increase in loans and forex loans (see chart below) we can see that the rate of increase in RON denominated household has been falling slowly now for some time, but that the rate of increase in Total Forex loans and Household Forex was very very fast, but peaked in January, and is now declining. This could mean that the lending boom has now past its peak, and that we are into the downside, if so we should start to see some reflection of this in real economy data in the not too distant future.