Romania’s Ctrl Bk Sees Yr-End CPI At 5.7%

Romania’s central bank sees the year-end consumer price index deteriorating to 5.7% at the end of the year, 1.8 percentage points higher against the previous projection, due to the severe drop of the agricultural output, central bank governor Mugur Isarescu said Monday in a press conference.

The bank also raised the next year projection for inflation to 4.3% against its previous forecast of 3.7%. The central bank has set an inflation target of 3-5% for 2007 and 2.8-4.8% for 2008.

Besides pressures from agricultural prices, Isarescu said the negative base effect due to the abundant agricultural output last year and the correction of the currency leu due to international turbulences, have also contributed to the rise of the inflation index.

Romanian monthly inflation rose at its fastest pace this year in September to 1.08%, boosting the annual index to 6.03%, from 4.96% in August.

On October 31, the central bank decided to increase the key monetary policy rate by 50 basis points to 7.5% in order to temper the increasing demand which resulted in higher prices.

But the governor said Monday that a monetary policy based only on interest rates and minimum reserve ratios is not sustainable and can only partially compensate gaps.

“We can’t work only with the monetary policy rate, as it creates pervert effects,” Isarescu said.

He added the current policy mix which is based on a restrictive monetary policy, associated with a rapid growth in revenues above productivity, leads to inflationary pressures and external debt.

“We have to ask ourselves if the current policy mix still works. (…) The task of continuing the disinflation process and correcting the current account gap should be also assumed by the fiscal policy,” Isarescu said.

The Romanian authorities see the current account gap surging to 13.4% of gross domestic product this year, almost three percentage points higher against 10.6% of GDP last year.

“The foreign deficit has reached unsustainable levels. We have to prepare the country for a correction of this deficit, but we have to avoid a brutal one,” Isarecu said.

He said disinflation should rely less and less on the appreciation of the national currency in order to prevent the trade balance to worsen.

“A rethinking of our strategy is necessary as the turbulences on the international markets are consolidating and the country’s access to foreign financing will be more difficult,” Isarescu said.

The governor reiterated the fact that the fiscal policy should be more restrictive than the projected one, as Romania can’t accept a further increase of the current account gap.