Romania’s central bank kept its end-2019 inflation forecast at 4.2%, according to the latest Inflation Report published today. Hence, the NBR still sees inflation remaining way above the target interval (2.5%+/-1pp). At the same time, the NBR marginally upped inflation estimation to 3.4% from 3.3% at the end of 2020. As we expected, economic developments since the previous Inflation Report in May didn’t caused major changes in the central bank’s inflation forecasts for this year.
Specifically, the NBR sees the cumulative contribution of exogenous components only marginally revised upwards, following the developments recorded earlier this year. Falling oil prices in June affected fuel prices and July’s drop in the price of gas delivered to households hampered administered price growth. Thus, contributions of fuel and administered to overall CPI growth were revised downwards. However, the upward revision of tobacco inflation contribution was slightly bigger. The contribution of core inflation remained the same, even though adjusted CORE2 inflation accelerated in May and June, mainly affected by the new sales tax in telecom. That is because the NBR thinks that upward pressure exerted by higher prices in telecom services would gradually diminish.
The NBR reaffirmed its inflation forecast expecting economic growth in 2019 to be similar to 2018 before slowing down in 2020. Growth will remain mainly driven by household consumption, gross fixed capital formation should return to positive contributions by the year-end, while net export is seen to keep on coming with negative influence, but gradually decreasing in 2020. Gross fixed capital formation improvement is conditioned by the absence of adverse effects in the medium-term generated by the recent fiscal and budgetary measures. The CA gap will keep on deteriorating in 2019, after widening above 4% of GDP in the last months of 2018, but should relatively stagnate in 2020.
The balance of risks to the inflation forecast is assessed as being to the upside and are mainly due to domestic factors, even though the external ones remain relevant. Some domestic risks diminished since May, but the government fiscal and income policies remain a major source of risks, especially because elections are approaching. Risks associated with the still tight labour market are highly relevant, as well, the NBR said.