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UPDATE 1 - Drop in Romania's Aug inflation rate surprises analysts

UPDATE 1 - Drop in Romania's Aug inflation rate surprises analysts tanatat/

BUCHAREST (Romania), September 12 (SeeNews) - The fall in Romania's annual inflation rate in August has exceeded expectations, analysts said on Tuesday.

Romania's consumer price inflation slowed down to 1.2% year-on-year in August, from 1.4% in July, the national statistical office, INS, said.

"The surprise reading shifts the risk balance to our year-end inflation forecast of 2.3% year-on-year to the downside," ING Bank analysts said on Tuesday in a daily market comment.

With the increase of excise duty in two stages in September and October, with a first round impact estimated at 0.4 percentage points and an additional 0.1 percentage points second round effect, ING analysts still expect to see a marginal  revision to the upside of the year-end inflation projection of Romania's central bank if volatile prices do not surprise again to the downside in September.

"As the first round impact from higher excise duty drops out of the statistical base by the end of 2018, we have kept our end-2018 CPI forecast unchanged at 3.1%. Nevertheless, the inflation rate is likely to print above the upper limit of the NBR’s target band in the second quarter of 2018," analysts concluded.

Raiffeisen Bank analysts were also surprised by August inflation reading, as they were expecting flat dynamics.

"The decline was driven by the seasonal contraction of volatile prices for food products," Raiffeisen Bank analysts noted in a daily market report.

On the other hand, the weakening of the leu currency and the increases in fuel prices had an opposite effect on the inflation rate, according to the Raiffeisen Bank report.

"We expect the inflation rate to trend upwards, supported by the strengthening of underlying inflationary pressures, the hike of excise duties of fuels, and the dissipation of the favorable statistical base effect fuelled by cut of taxes in Q1 2017," Raiffeisen analysts added.

Food prices rose 1.59% year-on-year in August, while non-food prices were up 1.56%, INS said in a statement. Prices in the services sector decreased by 0.49% year-on-year in August.

On a monthly comparison basis, Romania's consumer price index (CPI) edged down 0.2% in August. Food prices fell 0.86% month-on-month in August, non-food prices climbed 0.14% and prices of services rose 0.2%.

Consumer prices rose 0.1% during the eight months through August.

Romania returned to inflation in January following 19 straight months of deflation that began in June 2015 after a 9% cut in VAT rate was expanded to include all food items, non-alcoholic beverages and food service activities. In addition, Romania cut its standard VAT rate from 24% to 20% at the start of 2016 and then again to 19% starting January 2017.

In an inflation report issued last month, Romania's central bank said it increased its annual inflation forecasts for this year and next, to 1.9% and 3.2%, respectively.

"The revision is largely attributed to domestic inflationary pressures, which are associated with the build-up of a stronger-than-previously expected excess demand throughout the forecast horizon," the central bank said in its inflation report.

On August 4, Romania's central bank maintained its monetary policy rate at record low 1.75%. The central bank last changed its key rate in May 2015, when it cut it by 25 basis points.

(1 euro=4.5978 lei)