Romanian consumer prices continued their decline in August, falling 0.5% on the month, taking the annual inflation rate to -1.9%, the country’s statistics institute said Thursday.
Compared to August 2014, prices of food items dropped 7.15%, while non-food items were 0.77% more expensive and prices of services grew 2%, the data showed.
Reuters analysts anticipated an annual inflation rate at -1.4% y/y, while Erste expectations were slightly closer to the actual data at -1.6% y/y.
“The central bank is unlikely to respond with additional monetary easing to this temporary decrease of inflation brought about by a series of supply shocks. Planned wage increases in the public sector in 2016 also speak in favor of prudent monetary policy at present,” Erste said in a report.
According to Erste, a rate hike is not ruled out in 2016 to counterbalance the impulse delivered by the fiscal easing to aggregate demand at a time when household consumption is already growing.
Erste inflation forecast is -0.2% y/y in December 2015 and 0.7% in December 2016. Inflation could remain negative until May 2016 after the cut in the VAT rate for food to 9% in June and the reduction of the standard VAT rate to 20% next January. Thus, Erste expects inflation to enter the NBR’s target of 2.5%±1pp only at the beginning of 2017.
A breakdown of the August inflation data reveals that supply-side shocks like the cut in the VAT rate for food in June and the decline in global oil price explain the largest part of the negative annual inflation.
Moreover, government’s decision to reduce medicine prices this summer and the seasonal effect of higher supply of fresh fruits and vegetables favored negative inflation rate in August, according to Erste.
According to the country’s statistics institute data, Romanians paid 0.79% less for food and 0.54% less for non-food items in August compared to July, while service prices rose 0.02% on the month.
Romania’s annual inflation rate turned negative for the first time in more than 25 years back in June, as the country cut the value-added tax rate for food products to 9% from 24%.
The country’s central bank cut down its inflation forecast for the end of 2015 to -0.3%, as it predicts the annual inflation rate will stay in negative territory over the next three quarters.
The central bank expects inflation will return to positive territory by the end of 2016, when the annual rate is seen at 0.7%.