NBR Governor: We are seeing a slight decline in the monthly inflation rate

NBR forecasts severe inflationary risks in the second half of the year and has revised its projection downwards, anticipating an increase of 6%, compared with 5.9%, the level announced in February.
With this adjustment the central bank is getting close to what the market expected, as most analysts forecast inflation at 6% or even higher this year.
“The trajectory is no longer far off from the interval accepted. We will remain outside the interval until the end of the first quarter of 2009, but will start to follow a significant downward trend towards the end of the year,” Mugur Isarescu, NBR Governor, yesterday explained during the presentation of the First Quarter Inflationary Report.
“We are seeing a slight decline in the monthly inflation rate, from 1% last autumn to 0.6% in March. It’s a bit less than we had expected, we would have liked a more serious decline,” the governor commented.
He explained that inflation over the last 12 months ended in March was 75% caused by eight product categories, with the most powerful influences coming from bakery products, vegetable oil, imported fruit (whose price increased due to the depreciation of the RON), and fuels and telecommunications. For instance, vegetables, fruit and eggs were over 20% more expensive compared with the same time last year. “These are sensitive products, that have an immediate effect on the living standards and therefore induced pressure to increase wages,” the governor noted.
The central bank revised its projection for next year downwards, given that it anticipates a significant decline in the monthly rate of price increase as of the end of this summer. Prices of agricultural products should play a significant part in this, as NBR hopes this farming year will be “at least normal”.
The inflation will therefore go down to 3.5% in December 2009, that is 0.4% below the forecast made in February.
As part of the inflation targeting system, adopted in 2005, NBR set a 3.8% inflationary target for this year, which it will miss, while next year’s level stands at 3.5%.
The targets announced are within an accepted interval minus/plus one percent.
NBR vice-governor Cristian Popa says that there are signs the agricultural year will be “much better, as a yield above the average of a normal year could provide significant help in curbing inflation.
As for the factors that could fuel new inflation increases, NBR points out the trend that wages have to increase faster that the productivity gains.
“When nominal wage increases are consistently higher than the productivity gains, there is a danger of us finding at the end of the month or at the end of the year, that the purchasing power has gone down,” Isarescu added.
Other risks NBR identified are new depreciation of the RON due to turmoil on international financial markets, the continued rise in the price of fuels, as well as a slippage of the budget execution. The Governor called again for an “adequate” mix of economic policies, which would entail restrictive monetary and fiscal policies.