Romania's c-bank sees return to inflation in Q1, warns of budgetary risks

Romania's c-bank sees return to inflation in Q1, warns of budgetary risks Mugur Isarescu, BNR governor Author (BNR) License: all rights reserved.

BUCHAREST (Romania), January 6 (SeeNews) - Romania's central bank, BNR, said on Friday it expects annual inflation in the country to return to positive territory in the first quarter and warned of potential risks stemming from post-election delays in adopting the 2017 budget.

"The most recent assessments reconfirm the outlook for annual inflation rate re-entering positive territory in 2017 Q1 along with resuming an upward course, amid the fading out of the transitory effect of the standard VAT rate cut to 20%, excess demand and higher unit wage costs. However, the annual inflation rate is expected to stand lower than the level highlighted in the latest medium-term forecast," BNR governor, Mugur Isarescu, said in a monetary policy briefing published on the central bank's website.

The risks to the inflation outlook stem from both domestic and external sources, Isarescu added.

"The internal risks are related to the post-electoral situation, the ones you see every day if we watch television: all the discussions and controversies. One thing we do not know yet is what the 2017 state budget will look like," he said.

On Wednesday, Romania's coalition government led by Social Democrat prime minister Sorin Grindeanu received the parliament's backing in a confidence vote. The cabinet lineup proposed by coalition partners PSD and centre-right Liberal-Democrat Alliance (ALDE) received the support of the Democratic Alliance of Hungarians in Romania (UDMR). The other three political forces in parliament  - right-wing National Liberal Party (PNL), centre-right Save Romania Union (USR) and Popular Movement Party (PMP) voted against.

The new government's most urgent task will be to prepare the 2017 budget, which should be voted on by mid-January, PSD leader Liviu Dragnea said on Wednesday.

The external risks to Romania's inflation outlook are related to the economic growth in the euro area, the challenges to the European banking system, the Brexit negotiations, as well as the prices of oil and other commodities.

"The BNR is closely monitoring domestic and external developments and stands ready to use all its available tools during this period of heightened uncertainty," the central bank governor said.

In its latest inflation report issued in November, BNR kept its 2016 inflation forecast unchanged at minus 0.4% and raised its projection for 2017 to 2.1%, while leaving monetary policy options open.

Romania's annual inflation rate turned negative last June due to the broadening of the scope of the 9% reduced VAT rate to all food items, non-alcoholic beverages and food service activities.

Romania's annual consumer price deflation deepened to 0.7% in November from 0.4% in October.

BNR maintained on Friday its monetary policy rate at record low 1.75%. The bank last changed the rate in May 2015, when it cut it by 25 basis points.

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