Bloomberg News

Romania’s Isarescu Sees Upside Risks to Inflation Outlook

August 06, 2012

Romanian central bank Governor Mugur Isarescu warned that inflation may accelerate beyond a central bank forecast after political turmoil pushed the leu to a record low and a drought may boost food prices.

The central bank kept its 2012 inflation forecast at 3.2 percent for the second time this year and at 3 percent for the end of 2013 as it lacked enough data on crops damaged by drought to incorporate in its outlook, Isarescu said today at a Bucharest press conference. Inflation will remain within the target band of between 2 percent and 4 percent, he said.

“The biggest part of the risks attached to our forecast are upside risks, including from the weaker leu, because of the European crisis and investors’ perception” of domestic turmoil, Isarescu said. “We couldn’t factor in the risks stemming from higher food and fuel prices because there are only incipient signs and we can’t introduce uncertain elements” in the estimate.

The Banca Nationala a Romaniei left its benchmark interest rate unchanged at a record-low 5.25 percent for a third consecutive meeting on Aug. 2 as political wrangling that led to the president’s suspension and sank the leu to a an all-time low outweighed concern about a deepening recession.

Leu Weakness

The leu is the world’s second-worst performing currency after the Sudanese pound, according to data compiled by Bloomberg on 175 currencies. It has declined 2.7 percent against the euro since July 2 after the Bucharest-based Constitutional Court delayed until the end of the month a ruling on the results of a July 29 referendum to impeach suspended President Traian Basescu.

The leu rebounded today from a record low reached on Aug. 3 of 4.6520 per euro and was trading at 4.5739 at 2 p.m. in Bucharest, a gain of 1.1 percent on the day.

Romanian inflation, which had slowed to a record low by May, accelerated for the first time in eight months in June and will probably continue to post a temporary rise in the third quarter because of an unfavorable statistical base effect on food prices, Isarescu said on Aug. 2.

Slumping Demand

Weak domestic demand is also limiting price growth as the country entered the second recession in three years in the first quarter, he said today.

Gross domestic product growth will probably slow to 1.5 percent this year, compared with 2.5 percent in 2011, according to International Monetary Fund and European Union forecasts.

The GDP forecast may be lowered to below 1.5 percent this year as “sufficient data,” including lower agricultural output, point to a further slowdown, Isarescu said on Aug.2.

The central bank will probably leave the main interest rate on hold this year, the median estimate of seven economists in a Bloomberg survey shows, as the battle continues between Basescu and Premier Victor Ponta’s coalition before elections in November or December.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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