Romania Set for First Year of Negative Inflation Since Communism

Romania’s central bank cut its year-end inflation forecast to less than zero for the first time since communism fell in 1989 as tax reductions damp price growth.

Inflation will be minus 0.3 percent in 2015, compared with a previous projection for a 0.2 percent advance, Governor Mugur Isarescu said Thursday in Bucharest. He forecast a 0.7 percent increase next year.

“The balance of risks to inflation is skewed upward,” Isarescu said. “Don’t think we don’t have inflation pressures, we do but they’re hidden behind the effects of the tax cuts.”

Inflation is being dragged down by muted price growth in the euro area and pre-election reductions in the value-added tax by Prime Minister Victor Ponta’s government. The central bank is fighting what it calls “temporary deflation” that set in two months ago. Policy makers have halted a rate-cutting cycle that brought borrowing costs to a record 1.75 percent.

With economic growth eclipsing the rest of the European Union in the first quarter, reaching 4.3 percent from a year earlier, the leu has gained. It’s advanced 1.5 percent against the euro in 2015 and was 0.1 percent weaker at 4.4123 at 12:32 p.m. in Bucharest, data compiled by Bloomberg showed.

Inflation will stay negative for the next three quarters and won’t return to the central bank’s target band of 1.5 percent to 3.5 percent until the start of 2017, Isarescu said Aug. 4. If all the planned tax cuts go into force along with a boost to state wages, policy makers may resort to rate increases to prevent the economy from overheating, Deputy Governor Bogdan Olteanu said this week.

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