“It is notable that Romania could not get closer to price stability despite the steep fall in domestic demand. There is a risk that monetary policy will maintain nominal interest rates above those in the euro area together with a stable exchange rate for a longer period, thereby recreating the toxic mix of future FX lending and potential future financial instability,” the report noted.
Fitch estimates Romanian inflation will ease in the second half of 2011, mainly due to base effects, but the year-end rate is still expected to come in above the central bank’s upper target of 4.5%.
“Further administrative price increases, in the context of the consolidation of state-owned enterprises in the energy sector, are widely expected to add around 0.6% to inflation by end-2011,” the report noted.
The agency’s report doesn’t factor in the July data on Romanian inflation. In fact, the annual rate fell to 4.85% in July, from 7.93% a month earlier, as the effects of a higher value added tax rate introduced last year have dissipated.
Fitch said tackling the high inflation remains Romania’s main challenge before joining the ERM II mechanism and, subsequently, the euro area.
“Romania’s official euro adoption target date remains 2015, which implies an ERM II entry in 2012. Fitch believes these targets are too optimistic, not least given the high inflation, although they still provide a useful role as a policy anchor,” the report said.