* CPI will remain in the red until mid-2016 * Romania will not face deflation
At the presentation of the Q3 inflation report, National Bank of Romania (BNR) Governor Mugur Isarescu talked plainly, without using any parables, about the internal and external economic situations. He was sober and concise. But he repeated several times that Romania is locked within a macroeconomic stability and solid GDP growth corridor.
Without emphasizing the merits of the Ponta Government, which has just resigned, Mugur Isarescu was unable to avoid the fact that domestic demand is the main economic growth engine. The lowering of the VAT on foodstuffs from 24 to just 9 per cent and the hiking of salaries – both in the public and private sectors – contributed to that. Because of this, but also because of the drop in fuel prices, the inflation rate registered in Q3 was below the level estimated by Central Bank specialists.
The Consumer Price Index (CPI) dropped steeply since June 2015, to -2 per cent in August. A slight change of trend was noticed in September. The Government however pointed out that the CPI will remain in the red until the summer of next year. Especially since, according to the new Fiscal Code, the overall VAT level will be lowered from 24 to 20 per cent on 1 January 2016.
In these conditions, BNR has revised downward, by 0.4 percentage points, its inflation rate forecast for this year, to -0.7 per cent, and did the same for its 2016 forecast, lowering it to 1.1 per cent. In its August report, BNR estimated an inflation rate of -0.3 per cent at the end of this year and 0.7 per cent in 2016.
Nevertheless, Isarescu believes that Romania does not face deflation, considering that the Central Bank has enough levers (the key interest rate in particular) with which to secure the monetary and financial situation. From this point of view, Romania fares better than Poland and Hungary. The uncertainties of a more reliable prognosis are determined by the external environment more than the internal one.
The arguments consist of the fact that all economic and extra-economic indicators are well consolidated. For instance, Mugur Isarescu pointed out that during the period analyzed the national currency was relatively stable, the most stable in the region or more stable than the currencies of Poland and Hungary.
Isarescu also noted that the construction sector registered growth, that the imports of cars and equipment have grown (a sign that industrial production is recovering and the economy has an appetite for investments). At the same time, he emphasized that the economic confidence indicator has grown exponentially in recent months.