Inflation prognosis-Romania's central bank ups to 5.9% the yearly inflation forecast

The Central Bank of Romania (BNR) estimates annual inflation will exceed 8 percent in the first half of the year and it should lower afterwards to 5.9 percent in December, BNR governor Mugur Isarescu said.

The central bank's prognosis shows this year's inflation target should be missed by 1.1 percentage points. BNR set for this year an inflation target of 3.8 percent, plus or minus 1 percent.

A 4.3 percent estimate for the end of 2008 was released in November 2007. "We must not create the illusion that inflation can be easily set on a downward track. We do not have a magic wand," Isarescu noted.

The BNR governor explained a good farming year would help the disinflation process.

In a move to cut inflation, BNR this month increased to 9 percent the monetary policy interest, this being the third such move since October last year, when this grew to 7.5 percent and January this year, when a 0.5 percentage points increase took place.

BNR's decision confirms the analysts' predictions, who spoke of a 0.5 to 1 percent increase. The central bank aims at a firmer management of the liquidity in the monetary market by adopting this move, a BNR release explains.

BNR also announced the increase of the risk provisions for foreign currency credits, the measure referring to the debtors who are exposed to foreign currency risks.

The central bank is currently trying to control inflation through a series of measures taken especially within the inter-banking market. Romania witnessed a 6.57 percent inflation rate at the end of 2007, thus exceeding the 4 percent target it wanted to reach.

After the 8 percent increase in January, the central bank voiced concerns over the level of consumption which stimulates inflation.

The present interest levels for the minimum mandatory reserves imposed on banks stand at 20 percent of banks' lei debts and 40 percent for hard-currency debts.

The central bank previously explained the overall demand level it is not backed by Romania's offer for goods and services. This has two main effects: it affects the external balance of payments and stimulates inflation, which widened over BNR's 4 percent target.

BNR emphasized the main reason for the high consumption level resides in the increase of salaries, which exceeds labor productivity.

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