Central bank governor foresees 3.9% inflation in 2007

Isarescu explained that the 0.2 percent increase in inflation prognosis was due a wider increase in volatile and administrated prices and international oil quotations. The inflation target for 2007 was set at 4 percent, so the change in prognosis is still below target.

The new forecast, announced by Isarescu as part of the six-month report on inflation, was expected by financial markets. Analysts contacted by Business Standard said they had been considering higher inflation.

Financial group ABN Amro's Chief Analyst, Radu Craciun, said the change announced by Isarescu signals that the key interest rate will not be lowered, at least for a while.

In the first half of 2007, disinflation was idle, especially because prices for fruits and vegetables rose abruptly, due to drought. The prices of bread and baked goods also increased, partly because of a process to adjust prices to European Union levels, according to Isarescu. Two weeks ago, prices of bread and baked goods rose 3-10 percent, as Romania is facing severe drought.

The main dangers in terms of disinflation continue to be the fiscal policy, generally, but especially salary rises, the latter not correlated to productivity, an adjustment in the timetable for administrated prices, and pressures brought about by a higher current account deficit.

According to BNR officials, one of the main uncertainties is the currency exchange rate. The central bank did not rule out the possibility of RON depreciation pressures, as the appetite of foreign investors for risky moves on financial markets is unpredictable, leading to an unstable exchange rate. Similarly, EU accession has led to the removal of several customs taxes and to "a more restrictive competitive environment, positive for inflation," Isarescu said.

2008 outlook
BNR has lowered its prognosis for inflation for 2008, to 3.7 percent from 5 percent, although inflation pressures are likely to occur due to the campaign for general elections. The ruling parties are prone to pass populist legislation during election years, including increased salaries and pensions, in order to secure more votes.