Falling inflation supports finance minister's calls for more rate cuts in Romania

Falling inflation supports finance minister's calls for more rate cuts in Romania
By Iulian Ernst in Bucharest November 12, 2020

Romania's headline inflation rate eased to just over 2.2% in October from 2.5% in September and 2.7% in August, falling deeper beneath the 2.5% centre of the interval targeted by Romania's National Bank (BNR).

The harmonised consumer price inflation calculated based on the EU-defined basket eased to 1.8% y/y in October, from 2.1% y/y in September.

The overall consumer price index increased by 0.22% in October compared to September.

The inflation rate was dragged down during the past three months (August to October) by food prices, which increased seasonally by only 0.11% in October (versus the 0.70% m/m increase in October 2019).

The annual growth in food prices decelerated to 4.3%% y/yin October, from nearly 5.6% in July and a past year’s maximum of 5.7% in April.

However, fuel (energy) prices remain the main downward driver of inflation as they contracted by 8.4% since the beginning of the year. The aggregate demand is seen by the state forecasting body as slightly shrinking, despite the stronger net public consumption and robust retail sales, which should have an impact on inflation’s downward trajectory as well.

The BNR lowered its inflation forecast for December 2020 to 2.7% in its August Quarterly Inflation Report, from 2.8% envisaged in the spring forecast.

In its latest rate move, on August 5, the BNR cut its refinancing rate to 1.5%.

Romania still has resources to use interest rate cuts and liquidity injections to stimulate the real economy sector, Finance Minister Florin Citu said in an interview with Radio Guerrilla on October 28. Similar remarks heralded the August rate cut. "Inflation will not rise, and the interest rates will continue to fall. Interest rates have fallen every month this year and will continue to fall. Romania still has room to push the economy through interest rates. Minimum required reserves can also [be slashed] so we can inject more liquidity into the economy, and push the economy," Citu told Radio Guerrilla.