Total inflation will come out of the target range of 1.5-3.5 percent in Q1 2018 and could increase up to around 5 percent during the summer, according to UniCredit quarterly report. The document reads that the National Bank of Romania (BNR) can not prevent a further rise of the short-term interest rate due to the rapid acceleration of inflation.
Inflation could return within the target range in Q4 2018, when high price increases in Q4 2017 – due to rising food and tax measures – will be removed from the basis of calculation.
“We forecast the total and base inflation will be around 3 percent in 2019,” UniCredit analysts note.
They also anticipate the depreciation pressures on the national currency may return, so that the interbank rates could rise even if the central bank increases the key interest rate. Thus, BNR will choose between a controlled and uncontrolled interest rate adjustment.
”The Romanian leu remains too strong, despite the fact that the EUR-RON trading range is above the 4.60 level. The 4.70 level could be reached if the central bank does not increase its monetary policy interest rate in the coming months,” the report reads.
According to the document, the highest risks the bank anticipates are two possible conflicts with the European Union (EU), one caused by the lax fiscal policy, and the second caused by the amendments to the Justice Laws adopted by Parliament in December 2017.
UniCredit also expects the economic growth to slow to 4.6 percent this year and 3.5 percent in 2019 from 6.6 percent in 2017. According to the report, the higher financing costs and the unpredictable fiscal environment could affect the economic growth in 2018-2019.