Inflation will continue to increase over the coming months and is expected to exceed 8% by the end of the quarter. It should, however, fall back to 5.9% by December, NBR Governor Mugur Isarescu explained yesterday.
In light of these forecasts, the central bank is faced with its second year in a row when it will miss its inflationary target, which had been set at 3.8% for 2008, with an acceptable variation of plus or minus 1%.
Since shifting to inflation targeting in 2005, NBR has managed to meet its inflation targets just once - in 2006.
"This swelling, this lump, as we have called it, is - we believe, temporary. It can, however, turn into a price-wages spiral, which is a danger that looms ahead." In a speech that lasted more than two hours, Isarescu reiterated the need to coordinate monetary policy steps with Government's fiscal discipline-related actions, as well as to temper the increase in people's incomes, which have to be correlated with productivity gains.
NBR formally keeps the same inflationary target for this year, and attempts to use this level as an anchor for the inflationary expectations of the market.
"Our option is not to revise targets, not because that would mean we're giving in, but because we have the chance to lower inflation. We are therefore trying to instil confidence, because we can overcome the situation - but only with adequate policies."
Isarescu believes inflation will stabilise in the second quarter, and will resume a downward trend as late as the second half.
"If the economic policy mix improves and the fiscal and revenue policies, in addition to structural reforms, make a significant contribution besides the monetary policy, we might see a stronger disinflation trend towards the end of the year."
NBR notes, however, that one of the main risks for this year's forecast is precisely the potential fiscal discipline slippages, considering this is an electoral year. Isarescu explains that, under the circumstances, the mere idea of a 'relaxation' itself is dangerous and fears potential slippages in budgetary fulfilment. The other risks mentioned are the continued fast-paced growth of salaries, as well as stirring inflationary anticipations and the petroleum price hike. On the other hand, NBR expects a good year for farming, which could help alleviate pressures on food prices.
In addition, the governor explained he would rather fight the battle with inflation through market mechanisms "not through subterfuges or mechanisms whose effect is only temporary", referring to trends that attempt to manage prices.
The head of NBR added the economy retained its growth potential, and the consolidation of the monetary policy would not lead to recession, but only to less demand, which remains higher than supply.
"We shall picture these factors in colours - in red and green so that you can see how big the discrepancy is between how much we produce and how much we consume. If we stimulate consumption any further, we can only go from bad to worse."
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