Romania’s central bank cut its 2013 inflation forecast for the second time this year, with a bumper harvest and a lower bread tax poised to drive down prices faster than expected and make room for further policy easing.
The Banca Nationala a Romaniei forecasts year-end inflation at 3.1 percent, compared with a prediction of 3.2 percent in May, Governor Mugur Isarescu said today in Bucharest. The bank also cut its 2014 projection to 3.1 percent from 3.3 percent.
“The inflation rate may fall toward the 2.5 percent target toward year-end and even earlier,” Isarescu said. “The main drivers that will push inflation lower are food products as we’ll see falling prices for these products from July through September.”
The central bank accelerated monetary easing on Aug. 5, when it cut its main interest rate by a half-point for the first time since March 2010. Policy makers reduced the rate to a record-low 4.5 percent as inflation is set to slow to within their target band toward the end of the year.
The Romanian leu, this year’s third-best performer against the euro among 24 emerging-markets currencies tracked by Bloomberg, weakened 0.6 percent to 4.4336 by 3 p.m. in Bucharest. The currency is heading for its biggest loss since June 19 on a closing basis, data compiled by Bloomberg show.
Inflation quickened to 5.4 percent from a year earlier in June from 5.3 percent in May and may slow to less than 4.5 percent in July, Isarescu said Aug. 5. The central bank is targeting a 2013 inflation rate of 2.5 percent, plus or minus one percentage point.
The government’s reduction of the value-added tax for bread and bread products to 9 percent from 24 percent starting Sept. 1 will probably push the inflation rate below this year’s forecast, Isarescu said. The rate will fall to as low as 2.1 percent in the first quarter of 2014, he said.
“We have a prudent forecast and a good harvest this year may actually quicken the downward trend of the inflation rate,” Isarescu said. “We have a 3.1 percent forecast because of falling food prices, but the value-added tax cut for bread will probably drive the rate lower than that.”
The Statistics Institute will release July inflation data on Aug. 12, according its website.
Gross domestic product advanced 2.2 percent from a year earlier in the first quarter, accelerating from a 1.1 percent pace in the previous three months. The economy will grow 1.9 percent this year, exceeding the previous forecast of 1.6 percent because of a pickup in export demand, Budget Minister Liviu Voinea said July 29.