Romania Macro Flash: Food Prices Continue to Cloud the Inflation Outlook

16 Februarie 2011

CITIBANK EUROPE PLC, DUBLIN - SUCURSALA ROMANIA

At 7.0% YoY, the inflation outturn in the first month of 2011 came in slightly higher than the consensus and our projection (both 6.9%YoY). Our forecast error arises largely from a higher-than-expected increase in food prices. Using seasonally adjusted data, the January reading translates into a rise in CPI inflation of around 0.39% MoM, which is lower than the December print (0.50%MoM).

In our view, adverse FX, food and commodity price shocks are the key risks to the inflation outlook for 2011. With these risks in mind, we think the large economic slack is likely to contain inflationary pressures. Barring unforeseen shocks, we expect inflation to decline to around 4% by the end of 2011 — vs. the NBR's most recent projection of 3.6% — from 8.0% in 2010. We note that the balance of risks associated with our year-end inflation is tilted to the upside due to the above-noted concerns and the possibility of administrative price adjustments.

We think the main thrust of the new Inflation Report corroborates our view that the NBR is likely to carry out a moderate easing this year, bringing its policy rate to 5.50% by the end of 2011. Moreover, the Government's decision to agree a new two-year deal with the IMF — a precautionary arrangement, which is reported to be about EUR5 billion (Reuters, 6 February, 2011) — once the current programme expires in May also strengthens the NBR's hand to support the economic recovery through easing its policy stance.

We recognise that there are risks to our rate outlook. A weaker-than-expected leu, higher food/commodity prices and administrative price adjustments could lead to a more challenging inflation picture than we currently envision. This would in turn undermine the NBR's ability to cut rates.

 

Forecast implications

First, a weaker-than-expected leu would complicate inflation dynamics, given the close link between inflation expectations and the exchange rate. Second, food and commodity prices — along with the possibility of administrative price adjustments — could push inflation higher than expected. With these risks in mind, we think the large negative output gap is likely to contain inflationary pressures. We expect inflation to re-enter the variation band around the 3% central target in the second half of 2011 once the first-round effect of the VAT rate hike fades away entirely. Looking ahead, we expect inflation to decline to around 4% by the end of 2011 from 8.0% in 2010.

1

2

The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...