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Romanian inflation slows to 17-year low in January

Romania's annual inflation rate fell to the lowest in 17 years in January, the month the nation joined the European Union, allowing the central bank to cut interest rates.

Annual inflation eased to 4%, the slowest since the fall of communism in 1990, from 4.9% in December. Consumer prices gained 0.2% in January after a 0.7% monthly advance in December, the National Statistics Institute said in an e-mailed news release today. Higher borrowing costs have helped slow Romania's inflation, which was at 317% in 1993. On Friday, the central bank cited slowing inflation as a main reason to cut its key interest rate 8% from 8.75%, more than analysts expected.
„Now we know why the National Bank of Romania cut rates,” Simon Quijano-Evans, a strategist at Bank Austria Creditanstalt in Vienna, said in an e-mail today. „EU-accession induced price pressure has been very minimal unless it arrives in the coming months. On top of that, if oil prices keep at current levels, we will see a very strong downward year-on-year effect on the consumer price index.”

The Bucharest-based National Bank of Romania, which met its inflation rate target of 5% plus or minus a percentage point last year, has said it targets similar mid-range annual rates of 4% plus or minus 1% this year, and 3.8% in 2008. The bank will issue its quarterly inflation report, and possibly a new inflation outlook, on February 15.
Gains in the local currency, the leu, have also helped ease prices quoted in dollars and euros, such as rent, telephone services and fuel. The leu gained 6.3% against the euro and 14% against the dollar amid an influx of cash as the country prepared to join the EU on January 1. An inflow of foreign investment last year as Romania prepared to join the EU on January 1 prompted the leu to advance 21% against the dollar and 8.9% against the euro. It outperformed all currencies except the Slovak koruna.

Ionut Dumitru, head of research at Raiffeisen Bank Romania, predicted an annual inflation rate of 4.5% or less by the end of this year although Friday's interest rate cut and other factors could weaken the leu and pressure inflation. „The main risk for inflation this year could be the agricultural output and a possible correction on the exchange rate,” he wrote in an e-mail today.
The statistics institute said natural gas prices dropped 3.5% in January and the prices of pharmaceutical products declined 1.8%. Non-food goods prices declined 0.2% in the month while food prices rose 0.2%, the institute said. Prices of services gained 1%, led by increases in auto insurance premiums, the institute said. (Bloomberg)