Romania’s central bank cuts inflation projection for 2016 to -0.4%

Romania’s central bank cuts inflation projection for 2016 to -0.4%
By Carmen Simion in Bucharest August 9, 2016

The Romanian central bank announced on August 8 it has significantly revised downwards its inflation projection for this year, by 1pp to minus 0.4%. The outlook for next year was also cut, by 0.7pp to 2%.

The major driver behind the revisions was the persistently low-inflation global environment, which is likely to counter movements in domestic prices now the base effects of last year's VAT cut on food have run out.

“The projected levels of CPI inflation reflect the effects of both domestic measures related to fiscal easing, income policy and the law on debt discharge and external factors, associated primarily with the outcome of the UK referendum,” the central bank said in its inflation report.

Annual inflation will remain in negative territory until the end of this year, and below the 2.5% target until the end of 2017, reaching 3% in the second quarter of 2018.

Consumer price inflation in Romania moved sharply from minus 3.5% y/y in May to minus 0.7% y/y in June, as the base effects of the VAT rate cut made in June last year (for food and beverages) vanished.

The BNR’s baseline scenario envisages faster economic growth this year than in 2015. Growth should slow down in the course of 2017, reflecting, among other factors, a deceleration in GDP growth among Romania’s main trading partners, against the background of the fallout from the Brexit referendum. Consumption and, to a smaller extent, investment will be the main drivers of brisk GDP growth.