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Policies of the new Gov’t put pressure on inflation, BCR warns

The economists of BCR, the largest bank in Romania, expect the inflation bounce-back in 2017, pushed by fiscal and budgetary policies of the new Executive.

PSD-ALDE government has established with cuts and exemptions from taxes and contributions for some and increases for others, higher pensions and salaries for state employees.

“We continue to project a rebound in inflation this year. In view of the elimination of the extra excise duty for fuels and further VAT cut to 19 percent and a cheaper electricity bill, the upward path of inflation in the first half of the year could be somewhat milder than we had previously expected. However, a further loose public wage policy coupled with tax cuts/reduction by income brackets in the case of state pensions heralded by the new Social-Democrat administration could turn the heat up on inflation,” a short note of Erste Group about Romania, signed by BCR analyst Dumitru Dulgheru, reads.

However, the financial specialists forecast that the National Bank of Romania (BNR) will keep the monetary policy rate at the same level of 1.75 percent for this year also.

“We are looking for the central bank to leave the key rate unchanged this year, as we continue to see annual inflation hovering just above the lower end of the target band (1.5-3.5 percent) at the end of 2017 (+1.7 percent),” the quoted source shows

On the other hand, the growing prospects for higher interest rates in the US, against a backdrop of skittish investor sentiment associated with Brexit and a sense of unease from a string of elections in the Netherlands, France and Germany, could increase the risk of capital outflows for CEE markets.

“Moreover, further widening of the budget deficit in Romania – following the government’s strong bias towards wages and welfare spending – adds to the uncertainty, putting upside pressure on government funding costs this year,” BCR notes.

These estimates come in the context in which BNR’s Board has decided on January 6 to keep unchanged the monetary policy rate at 1.75 percent per annum, to pursue adequate liquidity management in the banking system.

On this occasion, Governor Mugur Isarescu said in his speech that inflation will spring back into positive territory in the first quarter of this year, but the magnitude of the rebound will be softer than in the central bank’s forecast which currently stands at +0.8 percent.

As usual, the governor noted that main risks to the inflation forecast come from Eurozone growth concerns, the problems facing the European banking sector, Brexit negotiations and the international price of oil. As for the locally originating risks, the central bank chief mentioned that the 2017 country budget is needed to calibrate the monetary policy ahead.










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