Romania's inflation to see more pressures as salaries' growth is hard to control, central bank says

Inflation in Romania will be difficult to temper owing to pressures stemming from ascendant trend seen in salaries which will continue to grow as a result of workforce migration, according to the central bank governor, Mugur Isarescu, told MNI press agency.

Isarescu deems the annual inflation will remain above 5 percent in December. An optimum mix is a corroboration of tight fiscal and income policies and a temperate restrictive monetary policy not to generate a new national currency appreciation which cannot be sustained, according to the governor.

"Such a mix is difficult to obtain considering the workforce migration," Isarescu said for the Market News International press agency before the meeting with central banks governors to take place in Cape Town, South Africa.

Isarescu reiterated the prognosis showing a 5.7 percent inflation in 2007 after the consumer price index (CPI), an inflation indicator, jumped to 6.84 percent in October from 6.03 percent in September and 4.96 percent in August. Isarescu said the situation is still under control and estimated the CPI will   brake growth by spring 2008.

Inflation depends on a series of factors such as the salaries' growth rate which has constantly exceeded 20 percent from the beginning of the year, far above the labor productivity growth rate of only 10-11 percent which pressures the consumer prices.

In older statements, Isarescu pointed Romania is the sole European country with two salary hikes per year. "It is absolutely impossible to reach an one-figure inflation rate while salaries post two-figures hikes."

Isarescu warned Romania's top economic vulnerability resides in its external deficit. The increase of salaries outpaces labor productivity which combined with the appreciation of the leu leads to the widening of the external deficit, the governor explained.

The government approved the 2008 state budget bill on October 10. The document shows revenues to the general consolidated budget will totalize 172.8 billion lei, while expenditures would stay at 184.7 billion lei. Romania should have a budgetary deficit standing at 2.7 percent of the GDP.

The macroeconomic indicators the budget was built on consist of a 6.5 percent economic growth, a 3.8 percent inflation and a 13.3 percent of the GDP current account deficit. The unemployment rate should stand at 4.3 percent, down against this year's 5 percent.
 
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