Romania Halves CPI Forecast With Deflation Set to Extend to July

  • Central bank sees consumer prices advancing 0.6% in 2016
  • Governor cites lower energy prices for cut in forecast

Romania’s central bank more than halved this year’s forecast for consumer-price growth and extended the period it sees deflation persisting, citing tax cuts and plans to accelerate energy-market liberalization.

Inflation will stand at 0.6 percent in 2016, down from a previous 1.4 percent projection, with price growth resuming in July, a month later than previously planned, Governor Mugur Isarescu said Tuesday in Bucharest. Inflation will stand at 2.7 percent next year, inside the bank’s 1.5 percent-3.5 percent target band. Without the effects of the sales-tax cuts, 2016 inflation would be 1.9 percent, quickening to 2.9 percent in 2017, he said.

“We revised our forecast because of the significant decline in administrated energy prices, while the external environment remains strongly deflationary,” Isarescu said. “But we see inflation pressure building behind the effects of the tax cuts. We’d like this pressure to have a slow pass-through but this doesn’t depend solely on monetary policy.”

With Romania experiencing its first deflation since the fall of communism and the economy advancing at one of the fastest paces in the European Union, monetary-policy makers in Bucharest kept borrowing costs unchanged for an eighth meeting this month. Further complicating their task is the prospect of additional policy easing by the European Central Bank and Romania’s regional peers.

Stable Currency

The leu is this year’s fifth-best performer among 24 emerging-market currencies tracked by Bloomberg, gaining 0.8 percent. It’s outperformed currencies of regional peers with lower benchmark borrowing costs, such as Poland. Currency stability meant “massive interventions” on the foreign-exchange market weren’t necessary, according to Isarescu.

Consumer prices fell 3 percent from a year earlier in March after two cuts in the value-added tax. April data are due May 12. Economic growth may reach 4.2 percent this year, up from 3.8 percent in the last quarter of 2015, European Commission projections show.

Romania’s demand gap will close “sometime in the fall,” with the fading effect of the tax cuts to “define our behavior in the future,” Isarescu said. Lending growth will probably slow significantly because of a bill allowing homeowners to walk away from mortgaged properties and become debt-free, he said.

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