August 8 (SeeNews) - Romania's central bank, BNR, slashed on Monday its inflation forecast for both this and next year, citing persistent effects from the VAT rate cut and a downward trend in import prices.
The bank now expects an end-year deflation of 0.4% this year, speeding to an inflation of 2% at end-2017, down from previous estimates of end-year inflation of 0.6% for 2016 and 2.7% for 2017, it said in its quarterly inflation report.
"The projected levels of CPI inflation reflect the effects of both domestic measures related to fiscal easing, income policy or to the Law on debt discharge and external factors, associated primarily with the outcome of the UK referendum," the report reads.
BNR anticipates deflation, which slowed down to 0.7% in June after reaching a one-year high of 3.5% in May, to persist until the end of this year. In its previous report in May, the bank said it expected deflation to persist until July, a month later than previously envisaged.
Romania's annual inflation rate turned negative last June under the impact of broadening the scope of the 9% reduced VAT rate to all food items, non-alcoholic beverages and food service activities.
"The annual CPI inflation rate will post negative values until the end of 2016, then positive values, but below the 2.5% mid-point of the target in the course of 2017, reaching 3% at the projection horizon, i.e. 2018 Q2," BNR noted.
Romania's end-2015 deflation stood at 0.9%.
Last week, BNR maintained its monetary policy rate at a record low of 1.75%. The bank last changed its monetary policy rate in May 2015, when it cut it by 25 basis points to 1.75%.