Romania’s headline inflation remains subdued

Romania’s headline inflation remains subdued
By Iulian Ernst in Bucharest October 12, 2016

Romania’s consumer price inflation fell to minus 0.6% y/y in September from minus 0.2% y/y in August, in an unexpected deflationary move that further deferred expectations of monetary tightening. HICP inflation returned to negative territory, at minus 0.1% y/y in September, after the 0.3% y/y reading one month earlier – the first positive value in the past 15 months.

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

Food prices increased by less than 0.5% y/y in September, while prices of non-food goods and services fees contracted by more than 1% y/y.

The modest increase was particularly unexpected for food prices, which grew by nearly 2% y/y in August after the base effects of the VAT rate cut last June (from 24% to 9%) vanished. However, the prices of vegetables dropped by 5.5% m/m in September, in a move that did not follow the usual seasonal pattern. Fruit prices also decreased by 2.6% m/m.

The central bank’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.