September 12 (SeeNews) - Romania's annual consumer price deflation decelerated to 0.2% in August from 0.8% in July, the country's statistics office, INS, said on Monday.
Food prices rose 1.96% on the year in August, while non-food costs fell 1.42% and prices in the services sector went down 1.04%, INS said in a statement.
On a month-on-month basis, the consumer price index (CPI) edged down 0.07% in August, with food prices down 0.09%, non-food charges up 0.26% and services costs down 0.09%.
Romania's central bank, BNR, said last month it expected annual inflation to remain in negative territory longer than previously expected, until the end of 2016. In its previous forecast in May, the central bank said it expected deflation to persist until July, a month later than previously forecast.
BNR now expects an end-year deflation of 0.4% for 2016, and inflation of 2% at end-2017. This compares with end-year inflation forecast of 0.6% for 2016 and 2.7% for 2017.
Romania's annual inflation rate turned negative last June under the impact of broadening the scope of a 9% reduced VAT rate to all food items, non-alcoholic beverages and food service activities.
Romania's end-2015 deflation was 0.9%.
BNR maintained its monetary policy rate at a record low of 1.75% last month. The bank last changed its monetary policy rate in May 2015, when it cut it by 25 basis points.
Commenting on the figures, ING Bank analysts said that the softening deflation of August was above their call and the market consensus for a 0.4% year on year print, mostly due to volatile food prices.
"Vegetables and fresh fruit were responsible for a large part of our forecast error. This might suggest that the agricultural year might not be as favourable as we had expected, at least for vegetables and fruit, despite the fairly good news regarding cereals," ING Bank analysts said in a daily snapshot of financial markets.
As some negative factors are fading out in the August print, ING analysts see tentative signs of upside pressures on inflation from consumption.
For their part, UniCredit Bank analysts noted that the broad picture for inflation dynamic remains unchanged, with very low prices for oil, gas, and with imports helping to keep inflation at very low levels in spite of a jump in consumer spending.
"During 2016, we expect food prices to remain at very low levels due to another bumper harvest. Technical crops have performed particularly well, but vegetable and fruit outputs will also be elevated," UniCredit analysts said in a daily comment.
However, they added, the biggest risk to their assessment comes from the implementation of the Supermarket Law, which requires large retailers that at least 51% of displayed food products are purchased from the short supply chain, mostly locally.
"The benign dynamic of inflation should allow the BNR to remain on hold throughout 2016 and 2017. The bank has been turning more dovish during recent meetings and we expect it to maintain this bias as we move forward, keeping in line with the other Central Banks in the CEE region," they added.
Erste Bank analysts said that the INS data are in line with their baseline scenario, in which they see negative annual inflation of 0.2% in December 2016, followed by a moderate rebound towards 0.9-1% at the end of the first quarter 2017.
"The slow recovery in Eurozone inflation will probably continue to hold back local prices from growing more quickly, while a positive price differential of 0.5-1pp in favor of Romania for next year looks reasonable. We expect the central bank to keep monetary policy unchanged this year," Erste Bank analysts concluded.