Romania hikes benchmark rate as inflation threatens Eastern Europe

Publish date: 08-05-2008
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Romania's central bank hiked rates yesterday to counter a surge in inflation, and analysts say it may soon be followed by other policymakers in central and Eastern Europe as they face a common threat.

But in a sign the eurozone slowdown is dragging on emerging Europe, Czech data showed the biggest fall in exports since 2002 in March and a big contraction in imports.

Romania raised its benchmark rate 25 basis points to 9.75 percent, expected by a small minority of analysts in a Reuters poll. That came despite comments from policymakers that rates were at adequate levels to bring down inflation.

That move came hot on the heels of the Hungarian central bank's quarter point hike to 8.25 percent last week and a pledge that it was ready to hike again to fight inflation.

"The bigger picture here is while central banks in the West are cutting interest rates... central banks further east are all hiking, albeit for different reasons," said economist Neil Shearing from Capital Economics in London.

The Bank of England is set to trim rates again in the next few months, possibly as soon as Thursday, while the US Fed has slashed rates by 3.25 percentage points since September.

But in the eurozone, inflation is well above target and the European Central Bank is expected to keep rates at 4 percent on Thursday for the 11th successive month.

The Romanian leu currency slipped slightly against the euro to 3.6565 after the rate hike.

More hikes?

But while inflation is a common threat, the region's major economies differ greatly. The Czechs, Poles and Slovaks have strong exports and domestic demand and are helped to some degree on inflation by appreciating currencies.

Data yesterday showed the Czech foreign trade balance showed a 8.12 billion crown ($496.9 million) surplus in March, much lower than the 15 billion crown surplus expected.

The Polish and Slovak central banks held fire on rates last week, and the Czechs are expected to do the same today.

Like those three, Romania is struggling with a tight job market and high wage demands, but it is also facing overheating due to a credit-fueled consumption boom, a wide external gap, and a weakening in the leu currency.

Analysts said Romania and Hungary would probably hike again soon, both to fight price growth and to keep a solid premium over ECB rates to prevent outflow from their currencies.

"Even though the Romanian economy is slowing down, inflation is likely to remain well above the National Bank of Romania official inflation forecast in both 2008 and 2009 and the NBR is therefore likely to be forced to tighten monetary policy in the coming months," Danske Bank said in a research note.

Across the region, higher food and fuel costs have compounded with booming growth, a jump in domestic demand and demands from workers for double-digit wage hikes, threatening second-round inflationary effects.

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