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Romanian economy not overheating, c-bank should not act yet - UniCredit economist

Romanian economy not overheating, c-bank should not act yet - UniCredit economist Dan Bucsa, lead cEE economist Unicredit London

BUCHAREST (Romania), November 4 (SeeNews) - Although there are some signs suggesting Romania's economy is overheating, this is not the case yet, as salary growth will temper, lending will slow down and inflation could be lower than projected next year, encouraging the central bank to keep its key rate unchanged even in 2017, UniCredit London lead CEE macroeconomist, Dan Bucsa, said on Friday.

"I don't think that the Romanian economy is overheating, because we are standing at the peak of the economic cycle, we can already see the valley below. However, the dilemma is how are we going to go down - by sleigh or by walking?," Dan Bucsa said in a meeting with Romanian media in Bucharest.

Although we can already see the signs of overheating, such as rapid wage growth, well above productivity, rapid growth in consumption and retail sales, and accelerated growth in property prices, the symptoms will disappear in 2017, Bucsa added.

Romania's economic growth accelerated to 6.0% in the second quarter of 2016 from 4.3% the quarter before, due to strong performance of the agricultural sector and rising consumption, latest data from the country's statistics board, INS, show.

In Bucsa's opinion, the recent salary increases will not result in an overheating economy because they come largely from the increase in the minimum wage. Romania raised the gross bottom wage by 19% to 1,250 lei ($303/277 euro) in May. A series of proposals for wage increases with an estimated cumulative effect of up to 4 billion lei, or 0.5% of GDP, are awaiting a final vote in the Chamber of Deputies, the lower house of Parliament, on November 7.

Also, Bucsa opined, lending will slow down and fiscal policy will tighten after the general elections on December 11. The value of Romanian banks' outstanding loans to the non-government sector rose 1.2% year-on-year in September, reaching 216.8 billion lei , after growing 0.7% in August.

Inflation will remain below target, with the influence of low oil prices coming to an end but Eurozone inflation will continue to have a strong influence over domestic prices, Bucsa added. Romania's annual consumer price deflation accelerated to 0.6% in September from 0.2% in August.

UniCredit Bank expects Romania's economy to grow by 4.3% in 2016 and by 3.5% in 2017. Romania's gross domestic product grew by 3.8% in 2015.

The budget deficit is seen below 3% of GDP in 2017 but in order to keep it there, the future government will undoubtedly have to cut expenditures, especially for new investments, the macroeconomist said. Also, in an effort to sustain the salary increases promised before the elections, the new government is likely to slash co-financing for EU-funded projects.

According to Bucsa, the central bank should continue to limit itself to warning of the risks of a too loose fiscal policy but it has to leave the key rate unchanged, even in 2017.

On Friday, BNR, maintained its monetary policy rate at a record low of 1.75%, in line with analysts' expectations. BNR last changed its monetary policy rate in May 2015, when it cut it by 25 basis points from 2.0%.

Bucsa also said he expects Romania to meet the convergence criteria for joining the Eurozone in about 20 years.

"Currently, Romania is below 60% of European Union average in terms of GDP per capita and I think that there will not be a single country to join the Eurozone without reaching 80-90% of the EU average after the ill-fated example of Greece."

(1 euro = 4.5015 lei)

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