February 7 (SeeNews) - Austrian banking group Erste said that Romania’s inflation is expected to reach 8% by the end of 2023, revising its August estimate of 8.7% amid declining soft commodity futures prices and lower energy prices.
The downward revision is related to lower energy prices, given the price caps on electricity and natural gas over the next couple of years, coupled with an assumed decline in soft commodity prices, in line with their futures prices, Erste analysts said in an updated research report released on Monday.
New fiscal measures designed to keep price caps on energy prices until March 2025 and establishing electricity tariffs based on actual consumption rather than the average consumption of 2021 account for nearly half the forecast revision, Erste explained.
On the other hand, VAT rate hikes from 9% to 19% in sugary non-alcoholic drinks and from 5% to 9% in hotel accommodation, restaurant and catering services enforced at the beginning of the year are only seen to have a marginal impact on inflation over the short term.
Low-double-digit price increases in mandatory car insurance are expected to have an impact of less than 0.1 percentage points on inflation, while mid-double-digit price hikes would have a sizeable impact.
Supply-side pressures related to an increase in excise duties for tobacco in April are already reflected in increased cigarette prices starting with late December or mid-January.
Fuel prices are expected to decline marginally this year, due to the removal of the 0.5 lei ($0.11/0.10 euro) per litre compensation for car fuel in January, but somewhat limited by cuts in excise duties for petrol and diesel, along with firewood caps lasting until the end of March.
Core inflation is projected to peak in February at 15.4%, remaining in the double-digit territory until the last quarter of the year and staying above headline inflation over the following couple of years. The potential cooling of core inflation could ease the central banks grip on key rates and echo other central banks in the region who have signaled the end of their hiking cycles, analysts added.
Headline inflation is likely to remain elevated in the short term, nearing or exceeding the 15% mark, before falling by 3 percentage points at the beginning of the second quarter of 2023, due to a strong energy-related statistical base effect, and ending the year at 8%.
Uncertainties around Erste’s inflation forecast remain elevated over the short term and hinge on domestic and EU growth profiles, while the war in Ukraine and re-opening of China could heavily impact global commodity prices.
Analysts also expect the Romanian leu to depreciate against the euro by 2% on average, with the exchange rate reaching 5.05 lei per euro by the end of 2023.
Erste analysts said on Tuesday they expect Romania’s central bank to hold its key rate at 7% at its February 9 board meeting, after a dovish hike in January.
In November, Romania’s central bank raised its inflation forecast for 2022 to 16.3% from 13.9% projected in August, way above the upper end of its target band of 1.5-3.5%, due to supply-side risks amplified by the war in Ukraine.
(1 euro=4.9022 lei)