Deflation to Persist for Longer in Romania as Energy Prices Fall

  • Central bank sees consumer prices dropping 0.4% in 2016
  • Governor Isarescu points to oil, energy prices for decline

Romania’s central bank said the nation’s first bout of deflation since the fall of communism will persist for longer than it had previously envisaged as lower energy prices compound the fading effect of tax cuts.

Consumer prices will fall 0.4 percent in 2016, compared with a previous forecast for a 0.6 percent increase, Governor Mugur Isarescu told reporters Monday in Bucharest. Price growth will resume next year, reaching 2 percent and falling within the bank’s 1.5 percent-3.5 percent target band, he said.

“We see an overproduction of food in Europe and low oil and raw materials prices that impact prices in Romania, on top of the tax cuts,” Isarescu said. “We have a significant rise in consumption and the demand gap has already closed, so we can’t afford to over-stimulate the economy with another rate cut as some are suggesting.”

Faced with more than a year of falling consumer prices on one hand and a surging economy on the other, monetary-policy makers in the European Union’s second-poorest nation left borrowing costs unchanged for a 10th meeting last week. The bank must also manage fallout from a general election toward year-end, and the loss of Deputy Governor Bogdan Olteanu, who quit after being arrested on charges of influence peddling that he denies.

The leu is this year’s second-best performer among currencies in central and eastern Europe. Consumer prices fell 0.7 percent from a year earlier in June as the effect of a sales tax cut a year earlier began to dissipate.

“We still have a high degree of flexibility because the difference between money-market rates and the key rate is still high and we can keep this flexibility as long as the market points toward a need for increase,” Isarescu said. “We can’t cut reserve requirements for leu deposits because of excess liquidity. We have some room though to cut the foreign-exchange ones, but not right away and depending on developments.”