Romania sees sharp drop in H1 inflation, then within target

    Romania's central bank, which earlier today cut its policy rate for the sixth time in a row, said its inflation report will reiterate the outlook for a sharp, albeit temporary, drop in inflation in the first half of 2014 before returning to the bank's target band and then remaining in the upper half of the band due to changes to administered prices and a gradual narrowing of the negative output gap as the economy improves.
    The National Bank of Romania (NBR), which cut its rate by 25 basis points to 3.50 percent, did not give any specific policy guidance in its statement, apart from saying it would closely monitor domestic and global economic developments and calibrate monetary policy to ensure price stability over the medium term.
    The quarterly inflation report, which will be released on Feb. 6, points to faster disinflation due to one-off factors, such as above average crops in 2013, a cut in VAT for bread, flour and some bakery products, the base effect of the weak 2012 harvest, higher electricity prices in December 2012, along with more persistent factors, such as the negative output gap and inflation expectations.
    Romania's inflation rate fell to 1.6 percent in December from November's 1.8 percent, with the average annual rate for 2013 down to 4.0 percent in December. The central bank targets inflation at a midpoint of 2.5 percent within a band of plus/minus one percentage point.
     In its November inflation report, the NBR forecast end-2013 inflation of 1.8 percent and 2014 inflation of 3.0 percent and forecast that inflation would fall below the lower bound of its target range, i.e. 1.5 percent, in the first half of this year and then gradually rise.
    "The significant improvement in the path of inflation and the related outlook has enabled the central bank to gradually adjust the monetary policy stance over the past few months, while effectively anchoring inflation expectations and closely monitoring domestic and external developments," NBR said.
   Risks in the new forecasts related to volatile capital flows and the variability of investors' risk appetite as far as their exposure to emerging economies. Domestic risks relate to the implementation of structural reforms amid the upcoming elections.  
    Romania's economy has been improving in 2013 mainly due to higher exports - improving the current account - while consumption and investment are seen recovering more gradually. Lending to the private sector is negative, the NBR said, but rate cuts are feeding through to lending rates with a lag and the reduction in the minimum reserve requirements should provide further incentives for lending to the Romanian economy.
    The country's Gross Domestic Product expanded by 1.6 percent in the third quarter from the second quarter for annual growth of 4.1 percent, up from 1.5 percent in the second quarter.

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