ANALYST FORECAST - Romanian September Inflation Seen Slowing M/M but Speeding Y/Y

October 8 (SeeNews) - Romania's consumer price inflation in September is expected to have slowed down month-on-month but to have accelerated on the year, analysts said.

The median forecast of four bank analysts polled by SeeNews last week put the monthly increase in Romania's consumer price index (CPI) at 0.65% for September, compared to a monthly rise of 0.86% in August. The analysts see year-on-year inflation at 5.55% in September versus 4.96% for August reported by the country's statistics board INS.

INS is expected to issue September inflation figures on Wednesday.

"The main drivers of inflation in September should be the increase in food prices, the depreciation of [the Romanian currency] the leu and the increase in railway tariffs," Ionut Dumitru, an analyst with Raiffeisen Bank said. "The prolonged drought from the summer will sustain further the increase in food prices in the next months."

The leu lost 2.6% versus the euro in September.

"We expect the annual rate of inflation to reach 6.0% in October. It could decrease in December below 5.0% only if there is no surprise in regulated prices and the leu appreciates from the current level,” Dumitru said. He did not rule out the possibility of end-year inflation exceeding the central bank’s (BNR) target of five percent.

BNR, which switched to direct inflation targeting in 2005, has put its inflation target for this year in a range from 3.0% to 5.0%. It has confirmed its 2008 and 2009 inflation targets at 3.8% and 3.5%, respectively, both with a target band of one percentage point.

BNR said in August it has raised its annual inflation forecast for 2007 by 0.2 percentage points to 3.9%, still within its target band, and has lowered its end-2008 inflation projection to 3.7%. In May the central bank projected end-2007 inflation of 3.7% and 4.2% inflation for end-2008.

Ciprian Dascalu, an analyst with ING Romania, expects the BNR to substantially revise its annual inflation forecast.

“The recent inflation figures have forced us to raise our end-2007 forecast from 4.3% to 4.9% […] Our inflation forecast update is due to the further increase of food prices given the drought affecting the supply, leu depreciation […] in September and the recent announcement that the government will increase gas prices by 3.7% in the fourth quarter and its second round effects,” Dascalu said.

However, he expects that "the base effects totaling 2.1 percentage points and the euro/leu forecast of 3.35 during the fourth quarter should keep inflation just within the BNR’s target band."

Most of the analysts polled by SeeNews do not expect the BNR to change its key interest rate at its next monetary policy meeting due on October 31. Dumitru was the only analyst to project a hike. "We expect BNR to react to the sharply deteriorating inflationary expectations in the next meeting in October and to hike rates."

BNR decided to keep its key interest rate unchanged at 7.0% at its last two monetary policy board meetings held in July and September because of slowing disinflation and economic growth. At its previous four board meetings this year the Romanian central bank cut the key interest rate by a total of 175 basis points to 7.0% to reflect slowing inflation.

The four analysts polled by SeeNews made the following projections for the monthly and annual change in September CPI and end-year inflation forecast for 2007 (in percent):