Romania's Central Bank Contends With Upward Inflation

by: Interactive Brokers
Summary

Market participants are set to receive the National Bank of Romania’s monetary policy decision in the week ahead, while consumer prices continue to post higher-than-expected increases.

Romania’s CPI rose to its highest peak in April since December 2012, above the central bank’s target band, and spurring some in the market to consider a potential rate hike.

Meanwhile, aluminum giant Alro Group is scheduled to post its financial results for the first quarter on May 16, after the materials sector recently hampered Romanian equities.

Europe: The Week Ahead (May 15-22)

Market participants are set to receive the National Bank of Romania’s monetary policy decision in the week ahead, while consumer prices continue to post higher-than-expected increases.

Romania’s consumer price index (CPI) rose to its highest peak in April since December 2012, far above the central bank’s target band, and spurring some in the market to consider a potential rate hike.

CPI registered 4.1% year-over-year in April, up from 4.0% in the prior month, while the NBR had left its monetary policy rate unchanged at 2.50% at its latest meeting in early April, where it has resided for the past year.

The central bank highlighted that the annual CPI inflation rate rose from 3.27% in December 2018 to 3.32% in January and 3.83% in February 2019, standing above the upper bound of its 1.5% to 3.5% range and higher-than-expected.

In fact, all major CPI components posted higher-than-expected increases during this period, mainly on the back of a pick-up in the prices of vegetables and fruit, as well as tobacco and energy costs. Rising demand-pull and wage cost-push inflationary pressures, as well as the local currency leu exchange rate, have also spurred an upward rise in core consumer price inflation.

Moreover, growth in the country has been slowing, marked by a “sizeable widening” of the current account deficit compared to the same year-ago period.

In 2018, the pace of GDP growth plunged to 4.1% from 7% in the previous year, underscored by a fall in investment, a larger negative contribution from net exports, as well as a slower rise in private consumption.

Wednesday, May 15

  • National Bank of Romania Interest Rate Decision

Thursday, May 16

  • Alro Group - Earnings (Q1)

Wednesday, May 22

  • National Bank of Romania Monetary Policy Meeting Minutes

The NBR added that the uncertainties and risks surrounding the inflation outlook “stem from the fiscal and income policy stance and labor market conditions.

“The evolution of the current account deficit remains a matter of concern. Also important are the uncertainties related to the pace of euro area and global economic growth, the international oil price developments, the monetary policy stances of the ECB and of central banks in the region, and to the effect of Brexit.”

Public debt prices fall

Against this backdrop, the yield on Romania’s 10-year government note has risen by roughly 32bps over the period of May 7, 2019 from its 52-week low of 4.58% set in early March 2019. The note was last trading at a yield of around 4.89%, according to Bloomberg.

Prices on the country’s bond maturing March 11, 2029 has skyrocketed to 104.10 earlier in May from a 52-week trough of 97.02 set in late January, according to IBKR Trader Workstation. They have since settled down to around 103.345.

Materials drag down Romania’s equities

In equity trading, Romania’s stock market, the Bucharest Exchange Trading Index (BET), was last down around 0.35% to a little north of 8135 after gaining about 5.35% year-to-date in 2019. The index Tuesday was dragged down by a more than 5.3% plunge in the materials sector, dominated by aluminum company Alro.

Alro noted that during the first quarter of 2019, the recent fall in aluminum prices, influenced by several factors, including the risks of higher production output in China, U.S.-imposed tariffs, and potential new imposed barriers.

The metal has declined in value by roughly US$536 from its 52-week high of US$2345 set in June 2018.

While Alro Group generated higher sales year-on-year in the latest quarter, its EBITDA margin contracted to 12.3% from 17.7% over the same period.

Alro Group is scheduled to post its financial results for the first quarter on May 16.

Investors will be paying close attention to Romania’s rate decision, in line with its rate of inflation, while those in the metals market will likely be keeping an eye on Alro’s earnings, as well as the performance of BET and its materials sector.

Note: This material was originally published on IBKR Traders' Insight on May 14, 2019.

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