Savings are impossible - inflation exceeds interest rates

Given the fact that the inflation rate exceeded 7% in July, due to the raise of the VAT, the interest rates offered by the banks for deposits don"t even cover inflation.

In July, inflation climbed to an annual rate of 7.14%, after the monthly inflation rate advanced 2.58%, according to data from the National Statistics Institute (INS) published yesterday.

However prices increased less than the Romanian Association of Financial and Banking Analysts (AAFBR) predicted, which were forecasting an annual inflation rate of 7.5% in July.

On average, banks pay up to 7% for deposits in lei, but due to the 16% tax on interest revenues, and the banks" fees, the final yields are far lower.

For comparison, in May 2009, banks paid 15% a year for savings in lei, double compared to the average interest rate for 2010.

Nicolaie Chidesciuc, the chief economist of ING Bank, tried to answer the question asked by BURSA whether saving remains profitable under the current circumstances: "The real interest rate ex-post is negative, meaning that people who set up deposits paying them 7% one year ago, have lost money so far, but the real interest rate ex-ante will be positive, which continues to make saving viable".

ING analysts are predicting the inflation rate would fall below 5% in 2011.

The NBR also recently revised its inflation forecast for this year from 3.7% to 7.8%, following the raise in VAT, and revised its inflation forecast for 2011, from 2.8% to 3.1%. The inflation target of the central bank for this year is 3.5% plus/minus 1%, and 3% plus/minus 1% for 2011.

Analysts expect inflation to reach 8.1% at the end of the year, with predictions ranging between 7% and 8.5%.

"Depending on pressures on food prices caused by the floods we could see increases of the policy rate", concluded M. Chidesciuc.

Prices of foodstuffs were hit the hardest by after the Vat was raised to 24%, as their prices increased 1.9% in June, whereas prices of non-food goods increased 3.1%, and the costs of services increased 2.6%.

The largest price increase for foodstuffs was that of fruit and canned fruit, (13.41%), as well as vegetables and canned vegetables (+4.42%).

For non-food goods which account for 44.7% of the consumer price index, major increases were seen for electricity, gas and central heating, (+6.31%), hygiene items, cosmetics and medical items (+5.58%) and cultural and sports items (+4.82%).

• Prices of fruit and cigarettes increased 7% in just a month

The largest raises were posted by the price of cigarettes, fresh fruit, citrus, train tickets and telephony subscriptions, whereas the largest price decreases were seen in airplane tickets and potatoes, according to data from the National Statistics Institute (INS).

The price of cigarettes increased 9.47% in July, whereas the price of fresh fruit and citrus increased 7.1%, and 6.4% respectively. The raise of the VAT to 24% had an even stronger impact on cigarettes, for which excises are calculated based on VAT.

The price of train tickets increased 5.5% whereas the price of telephony subscriptions increased 5.75%. Prices of electricity and natural gas increased 4.2%. Airplane tickets and potatoes got cheaper by 4.5%, and 4% respectively.