July 4 (SeeNews) - Romania is expected to post deflation of 0.8% in 2016, before it turns to inflation of 2.1% in 2017, ING Bank analysts said on Monday.
Previously, ING Bank analysts saw Romania's 2016 deflation flat and 2017 inflation at 2.7%.
The main factors behind the revision are ING’s new oil forecast for end-2017 down from $65 (58.5 euro) per barrel to $45 per barrel, the recently announced regulated price cuts for electricity and gas in July and mostly softer food prices, the bank said in its inflation update report.
The analysts' assumptions include a significant rise in energy prices in the first half of 2017, implementation of the planned 1 percentage point headline VAT cut to 19% in January 2017 and the elimination of the special excise duty tax for fuel.
"Still, assuming a 10% public sector wage hike in 2017, the budget gap would reach 3.7% of GDP under a no-policy-change scenario, with upside risks due to new populist decisions ahead of November 2016 general elections," analysts commented.
Another disinflationary factor on the horizon is a good agricultural year, expected to keep food prices fairly subdued going forward, they added.
The analysts also said that a proposed bill to impose a minimum 51% share of supermarket sales to Romanian food produce would have a hard-to-estimate, yet certainly material inflationary impact.
"Delaying January 2017 fiscal measures could save 0.8% of GDP, to keep the deficit narrower than the 3.0% of GDP threshold and this will add 0.8ppt to our end-2017 inflation call."
On top of these risks, strong private demand that is envisaged to be boosted further by loose fiscal policy and accommodative monetary conditions could exert upside pressure on underlying inflation.
ING maintains its forecast on a first rate hike by the end of the second quarter of 2017, with policy normalisation starting in February, instead of January, like expected previously.
"Due to the UK’s Brexit referendum results, we acknowledge that the ‘low for longer’ rates scenario cannot be ignored and we see material risks for the start of the policy normalisation process to be delayed after mid-2017," analysts concluded, highlighting the inherent high forecast uncertainty.
Romania's annual consumer price deflation deepened to a one-year high of 3.5% in May from 3.3% in April, data of the statistics office, INS, showed.
Last week, Romania's central bank, BNR, said it sees annual inflation remaining in negative territory longer than previously expected. Also, it decided to maintain 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.
($=0.9001 euro)