Romanian consumer prices edged up 0.1% m/m in March after the 0.1% m/m decline in February, but the annual rise remained constant from last month at 0.2% y/y.

Romania’s headline inflation returned into the positive area in January (0.05%), after it dropped into the negative region in June 2015 when the VAT rate for food and non-alcoholic beverages was cut by 15pp. Low energy prices have added to the disinflationary pressures prompted by the VAT rate cuts in the past years. But at this moment the outlook changed significantly. The recent 1pp cut in the general VAT rate in January this year had a much softer impact on consumer prices and, despite uncertainties related to the oil price on international markets, energy prices on the local market will certainly not exert the same disinflationary pressures as seen in the past (expectations are skewed rather toward inflationary pressures).

Romania's central bank will review the inflation forecast at its May 5 monetary policy board and a key issue will predictably be the fiscal policy. The repeated wage hikes in the public sector will be followed by others in the future, the government announced. Under a bill aimed at the reform of the income policy in the public sector, wages are planned to increase at high rates by 2022. While this might not impact the short-term inflation outlook, the magnitude of the move requires comments from the monetary authority as regards the medium and long-term impact.

Romania’s central bank has cut its inflation forecast for this yearend in February by 0.4pp to 1.7%, citing the effect of a slower than previously projected build-up of inflationary pressures from excess demand. Inflation will, however, accelerate to 3.4% at the end of 2018, an upward revision of around 0.2pp from the previous forecast in November.