2014 inflation prognosis changed to 3.5 percent

Central Bank views the foreign environment as the highest risk for the inflation trend, Mugur Isarescu, governor of BNR

The 3.5 percent inflation prognosis for this year released by the National Bank of Romania (BNR) is up by 0.5 percent, compared to the November 2013 estimate that was determined without taking into consideration the increase in exchange rate and inflation excise taxes or the additional fuel excise tax. The Bank also forecast a 3.2 percent inflation for end 2015.
“We can practically say inflation will range between 2 and 3 percent, with the exception of the first half of the year. In a few days, we will receive the INS report and the world will see a 0.6 percent inflation; the same goes for March (between 0.6 and 0.7 percent inflation) and what I am saying now will be put under question. Some analysts will say ‘deflation,’ meaning BNR should lower interest rates. These are statistical effects, the impact of which should not be overestimated,” Mugur Isarescu, governor of BNR, stated yesterday at a press conference on the quarterly inflation report. He mentioned BNR’s inflation prognosis is only based on facts, not risks.
“Based on our calculations, the assessed impact amounts to 0.5 percent of exchange rate fuel prices and the impact of the additional 7 eurocents excise tax,” the governor added. According to a summary of the quarterly inflation report, tobacco and alcohol prices will account for a 0.4 percent impact on the annual inflation. The BNR official underlined the annual average inflation will only reach target values in spring. “We should take a more careful look at average inflation, particularly since we have a stable multiannual target. There’s also the Maastricht criterion, which focuses on the annual average inflation rather than the annual inflation,” Isarescu explained.
He went on to say BNR has been aiming for the annual inflation until now because this index is much more relevant both in assessing inflation trends and for the public, before inflation levels dropped.
“Romania’s highest risk derived from the inflation prognosis is the foreign environment, which is shaping to be extremely volatile. We were unable to anticipate the Turkish crisis and yet another two or three crises may break out in our vicinity,” the central bank official stressed. Nonetheless, Isarescu believes Romania’s position inside this “potential crises hotbed” will not necessarily result in a negative effect on our country.
Capital flows dependent on central banks from other countries and the economic trends from the Euro Zone were listed by the BNR governor among foreign risks.
Where domestic risks are concerned, Mugur Isarescu referred to the elections to be held this year, which may generate uncertainty regarding structural reforms.
Last year’s inflation rate was 1.55 percent, an all-time low, and food prices dropped by almost 2 percent. The service sector reported a 3.43 percent growth, whereas non-food prices went up by 3.62 percent.
Domestic demand slowly coming back on course
Mugur Isarescu also noted the domestic demand seems to be slowly coming back on course, while the main focus of citizens and companies alike is still saving money. “The domestic demand is slowly coming back on course, a little slower than we would have liked, and it poses a problem. On the one hand, it has a positive effect on the inflation policy, while on the other, we are not concerned with inflation alone; we also need economic stability. The more so, as in Hungary, for instance, foreign currency loans are more frequent than national currency loans. Both Romanian companies and the citizens are concerned with saving their money. (…) Consumers’ confidence levels have remained consistent, slightly going up in December 2013,” the governor pointed out. He also mentioned the measure by which fiscal loans will be granted to natural persons by the state as of April 1 is better for Romania than Hungary, for example. “In other words, I believe now is the time for Romania to stimulate consumption in a balanced manner,” Isarescu emphasized.
National currency in balance compared to other currencies
Compared to other currencies, the leu was on a balanced trend last year, consistently reaching values within the 5 percent range, according to Mugur Isarescu. “Significant movement was also not reported with respect to the other three currencies comparable to ours – the forint, zloty, and Czech koruna – all of which varied within the 7 or 8 percent range. These oscillations are completely justifiable. Sooner or later, we will enter the European exchange rate system. The sole exception is the leu’s trend relative to the Czech koruna, compared to which it depreciated by 6 percent,” the governor said. He also remarked Romania’s risk premium is on a favorable trend, permanently recording values under Hungary’s risk premium.

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