Romania's central bank revises CPI forecast upwards, more tightening seen ahead

BUCHAREST: Romania's central bank has revised upward its inflation forecast for 2018 with further jumps in prices seen ahead, before re-entering the target range in the fourth quarter, Governor Mugur Isarescu said on Friday, signaling further policy tightening.

The bank delivered a quarter point hike in its key interest rate to 2.25 percent as expected on Wednesday, seeking to curb rising inflation and that battle will not take long, Isarescu has said.

On Friday, the bank said inflation was seen at 3.5 percent in December against a previous 3.2 percent and that January data might reveal a figure a bit above 4 percent. In its quarterly inflation report it expects it at 3.1 percent in Dec. 2019.

The bank targets annual inflation of 1.5-3.5 percent.

"An acceleration of the annual inflation rate in the first three quarters is due to those components of the consumption baskets which are outside the monetary policy's field of action," said Isarescu.

In its report, the bank said: "...Inflation will temporarily hover above the upper bound of the variation band of the target, nearing 5 percent during the first three quarters of this year and standing higher than the levels projected last November."

Ionut Dumitru, chief economist at Raiffeisen in Bucharest, said the new forecasts "are aimed at signaling the need for tighter monetary policy due to significant inflation deviation from target in the months ahead," chiefly to wage hikes.

Romania is the second among central its European peers to start tightening from record low levels, after the Czech Republic. It began increasing borrowing costs for the first time in a decade last month and analysts estimate the benchmark will stand between 2.5 and 3.5 percent at the end of 2018.

Inflation rose to 3.3 percent on the year in December, sharply above the central bank's 2.7 percent forecast, fuelled by a jump in domestic consumption.

Isarescu said he was preoccupied by the steep ongoing expansion of the foreign trade shortfall and said the leu currency "does not have a field for appreciation."

Data released earlier in the day showed Romania's foreign trade deficit widened by about 30 percent on the year to 12.96 billion euros ($15.90 billion) in 2017.

The Romanian leu was trading at 4.6570 to the euro at 1140 GMT, 0.1 percent softer on the day.