Romania's headline inflation inches up to 6.8%

Publish date: 12-11-2007
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The consumer price index rose by 1% m/m in October, pushing annualized inflation to 6.84% y/y, due to administrative prices' hikes, prolonged draught and increase in international oil prices, as shown in a press release received by In October, CORE2 inflation, NBR's favourite measure, remained high, but slightly decelerated its growth rhythm to 0.93% m/m from 1.12% in September, as the Central Bank had tightened the monetary policy in the past month.

The edible goods' prices increased by 1.3% m/m in October, as the prolonged draught continued to show its adverse effects. The edible oil, vegetables, bakery and dairy products were the main drivers to consumer price index of food goods.

The prices of non-edible goods advanced by 0.7% m/m, on back of adminstrated prices growths (gas by 3.66% m/m and thermal energy by 0.88% m/m) and the rise of oil prices internatioanaly. Services' prices rose by 1% during October, on back of domestic currency depreciation (0.2% m/m) and change in telephony tariffs (mobile phone companies decided to shift tariffs to EUR from USD).

We consider that headline inflation has reached the highest level in October, as it is likely that the trajectory of inflation will revert to the downwards, in the next two months, ending the year at around 5.7% y/y, on back of favourable base effect and a slow down in the monthly growth dynamics of food goods' prices. However, this scenario depends mainly on the evolution of the domestic currency, which we estimated would recover to 3.30 zone towards the end of the year. Otherwise headline inflation might stand around 6.0% in December, especially if the price of oil barrel continues to increase on international markets.

Given the surge of inflation in the second semester of 2007, we anticipate that NBR would have to further hike the monetary policy rate on January 7, 2008 by 50 basis points to 8.0%, as NBR can not rely anymore on the exchange rate channel to induce disinflation in the next months.

The reaction of the market was limited, as headline inflation slightly outpaced the consensus estimates, which stood at 6.7% y/y. The local currency lost less than 100 pips after the inflation data were released.

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