Romania’s central bank slashes inflation forecast by half for 2016

Romania’s central bank cut its inflation forecast for this year by 0.8 percentage points from the February estimates, placing it at 0.6 percent, according to its quarterly inflation report.

The National Bank of Romania (BNR) had previously placed the inflation for this year at 1.4 percent, and the dramatic drop was based on a cut in household energy prices, a climate of low prices in Europe and potential lower economic growth stemming from the controversial debt discharge bill. The law is already making waves across Romania’s banking sector, with eight large banks adjusting their mortgage terms to fit the new loan conditions, including state-owned CEC Bank and with BCR being the last one to join in.

The central bank also lowered expectations for 2017, from 3.4 percent included in the February report, to 2.7 percent. According to the quarterly report, without the impact of the round I of the reduction in VAT, inflation would reach 1.9 percent in 2016 and 2.9 percent in 2017.

“We did an analysis of how the successive reductions of VAT have affected and still affect the consumer price index. According to these calculations the three rounds (which started with bread and bakery products, spread to all food products and then, since January 1, to all products) have affected more than 80 percent of the consumption basket. In January 2016, reducing the standard rate covered about half of the consumption basket. We have an estimated transmission coefficient of about 70 percent. Something more than two-thirds of the reduction was reflected in prices. It is lower than in other stages of reduction. In the case of bread, the transmission coefficient was 93 percent and for food in general it was 80 percent,” said BNR governor Mugur Isarescu.

He added that this year the effects of excess of demand will start to show and that it will define the bank’s future behavior, which will “boost vigilance and ready all intervention instruments to keep price and financial stability.”

Asked whether lower inflation forecasts gave the bank a window of opportunity to further cut minimum reserve requirements, Isarescu said there was “a possibility they could be slightly delayed or less clear.”

Reserve requirements for commercial banks’ liabilities stand at 12 percent for hard currency and 8 percent for RON. Though adding that he “categorically” saw a need to narrow the corridor between the bank’s lending and deposit facilities, he did not specify whether this move would be made this year.