Romania’s central bank revised downwards the projected values of the annual CPI inflation rate under the baseline scenario sketched in its August 8 Inflation Report, by 0.1pp for the end of this year and by 0.3pp for the end of next year compared to the previous report in May. Q2 inflation was already 0.2pp below projection, the central bank explained.

Inflationary expectations remain the main driver of core inflation, but it is seen as stabilising over the next eight quarters and even easing marginally in Q4 this year and Q1 2019. Smaller imported inflation will drag down core inflation during the next quarters, though, while the inflation  generated by economic growth being above potential is set to be the smallest of the three key inflationary drivers.

Specifically, the headline inflation is projected to slow down to the 3.5% y/y bound of the variation band of the target at end-2018 and 2.7% at end-2019. At the eight-quarter projection horizon in Q2 2020, it is seen reaching 2.8%. Core inflation will ease to 2.6% y/y in Q4 (from 3% y/y in Q2) to not exceed 3.2% y/y by the end of the eight-year forecast period.

The revision reflects slower expected core inflation and softer hikes of the administered prices, while the inflationary pressures generated by fuel and tobacco prices are seen now as being stronger than estimated in May in the previous projection.

A smaller deviation from the potential GDP (the growth rate not generating inflation, by definition) in Q2 and during the two-year forecast period is one of the fundamental causes of the revision made by the central bank. Namely, the upward deviation in Q1 was 2.1% versus 2.8% projected in the previous forecasting round. The deviation will slightly increase but not exceed 2.5% and narrow to 2% by the end of the two-year forecast period.