Central Bank Forecast on Inflation

The Central Bank of Romania is expecting a negative inflation rate in July. Also, preliminary data show that prices could drop, too

Daniela Budu, 07.08.2018, 13:03

The National Bank of Romania expects inflation to drop in the third quarter of the year, but it will stand around 3.5%, close to the maximum limit of the range targeted by the Central Bank. The Governor of the National Bank of Romania, Mugur Isarescu, has stated that, according to preliminary data, negative inflation and a drop in prices could be recoported in July.

Governor Isarescu has explained which are the mechanisms that influence this process: “Uncertainty and the risk associated to inflation are mainly rooted in the evolution of prices, in particular of gas and electricity, the volatile prices of foodstuffs, as well as the labor market conditions and fiscal policy requirements. Future developments with regard to oil price, the pace of economic growth, inflation dynamics in the Eurozone and in the EU and, implicitly, the monetary policy of the European Central Bank and of the central banks in our region are also relevant.”

The potential drop in the annual inflation rate, the increase in interest rates on the interbank exchange market, the decline in market liquidity, the national currency appreciation and the slowdown of the economic growth rate have urged the Central Bank to maintain the key interest rate at 2.5%. We recall that the Central Bank has this year increased the key interest rate by 0.25 percentage points in January, February and May, respectively. According to Mugur Isarescu, the increase in the key interest rate will continue or will be stopped, also depending on what happens to Europe. The Central Bank’s decision to maintain the indicator at the same level was not anticipated by analysts, who had expected an increase.

Mugur Isarescu explains why: “They had probably expected a growth in inflation, a potential development which has not been confirmed by our data. People keep saying ‘the annual inflation rate is 5%, the highest in Europe, and that has created a certain perception. What we do is present the many facets of inflation. Monthly inflation rate has been flat in Romania for months now. When it has grown, it has done so because last year it was relatively low. So, it’s also a matter of perception.”

Mugur Isarescu has also stated that the Central Bank has managed to have the inflation rate follow a downward trend, but he has also added that he cannot say that the growth cycle of the key interest rate is over, given that uncertainty regarding economic growth and inflation in Europe still exists.