The exchange rate and more expensive oil keep inflation up

The depreciation of the national currency as well as the rising price for fuels kept the inflation at a high value in June despite the period of economic crisis, deem analysts, who expect the deflation to continue if the leu remains stable.

The country's statistics body INS announced today the annual rate of inflation lowered in June to 5.86 percent from 5.95 percent in May. Consumer prices rose on average 0.2 percent on the previous month. Prices for food products slipped 0.18 percent, non-food products were 0.42 percent more expensive and tariffs for services upped on average 0.43 percent.

"The inflation drop was in line with expectations. The main determinants were the price for fuel and the depreciation of the leu, without which we would have seen a monthly inflation very close to zero. The price for food products dropped, meaning the aggregate demand is contracting," declared for NewsIn Ionut Dumitru, chief-economist at Raiffeisen Bank Romania.

Analysts stress that in Romania consumer prices are very sensitive to the exchange rate, as the leu's depreciation in June could be seen in the core inflation.

"After two months in which the core inflation went down, it finally climbed back up in June, which comes to prove the high sensitivity of prices in Romania to the exchange rate, as the demand keeps on a shrinking trend," said Nicolaie Alexandru Chidesciuc, senior economist with ING Bank Romania.
The hike in the core inflation could slow down the process of relaxing the monetary policy rate by the central lender BNR.

"The central lender could adopt a cautious attitude at the monetary policy session and not operate a slash of 0.5 percentage points to the benchmark rate, but only of 0.25 percentage points," considers Chidesciuc.

Economists actually expect in the following months the evolution of the inflation to significantly depend on the exchange rate, following this price sensitivity.

"I believe the inflation will depend highly on the leu-euro exchange rate in the following months. If the exchange rate stabilizes, normally the inflation should drop, especially if the demand is lowering, and the pressure on prices for food products is smaller during summer," says Laurian Lungu, managing partner at Macroanalitica.

As the price for oil stabilizes, some analysts do not rule out the possibility of some drop in consumer prices during summer.
"It is possible that in the following months the monthly inflation to get very close to zero. We do not rule out the possibility of a negative inflation either, most probably in July or August," explained Dumitru.

Some economists highlight however that prices did not diminish significantly, although demand crashed, because many companies in Romania tried to keep their profit margin or to decrease it by a small amount, unlike firms in the West.

"This suggests a certain rigidity of the economic structure and that the market competition is not working as it should," said Laurian Lungu.

Citi analysts declare that among the risks posed by deflation this year is also the one tied to potential "side slips" of the fiscal policy.

"In the future, fiscal slide slips, the price of oil and a non-favorable reference exchange rate seem to be the key risk factors that could lead to deviations on the deflationary trend," a Citi report reads.

Romania's central bank BNR set a yearly inflation target of 3.5 percent, take or leave one percentage point. However, the last prognosis points to a 4.4 percent level at yearend, slightly revised from the previously set target.

At the end of last year the annual rate of inflation slipped to 6.3 percent over the BNR aim of 3.8 percent. Romania should keep a close eye on inflation as reaching the targets is crucial, an official of the International Monetary Fund (IMF) recommended after the institution agreed to grant an external loan to help prop up the economy and restart engines. Counselor to the BNR governor Adrian Vasilescu declared today for Realitatea TV that the inflation will stand this year between 4 and 5 percent.

Curierul National