Romania’s central bank cut its inflation forecast from 3.1% y/y to 1.8% y/y for the end of this year and from 3.1% y/y to 3% y/y for the end of 2014, according to the quarterly inflation report issued by the monetary authority on Nov 7.

Annual inflation will fall below the lower limit of the 2.5% +/-1pps target band in Q1 next year, but will return on an upward trend afterwards and near the upper limit towards the end of the projection interval in Q3/2015.

Compared to the latest inflation projection issued in August, the main adjustment is caused by the cut in VAT rate for some bakery goods operated by the government in September. Favourable grain and oil price dynamics have also prompted marginal downward adjustments in the projection. Nonetheless, other key drivers namely the expected imported inflation and notably a negative output gap wider than previously envisaged contributed to the downward adjustment of inflation pattern even more. The central bank also mentions improved inflationary expectations among the causes of the downward revision of its inflation projection.

In light of the updated GDP data, the central bank explains, the negative output gap has been revised for the entire forecast interval to levels entailing slightly stronger-than-previously-projected disinflationary pressures. Its negative assessed values, although expected to marginally narrow in the last half of the reference period, are seen persisting until the projection horizon.