Romanian inflation settling above 3.0%
Inflation came in at 3.1% in March, in line with our forecast and a touch below consensus. We expect inflation to remain around current levels for the next couple of quarters, with the central bank’s 3.5% upper bound likely to be tested in the last quarter of 2021. We maintain our 3.3% year-end forecast, with risks skewed to the upside
| 3.1% |
March inflation |
| Lower than expected | |
After three months of 2021, the Romanian inflation profile looks to be consolidating gently above 3.0%. The main takeaway from today’s reading is -in our view- the stickiness of the core inflation rate which came in at 4.0%, well above the National Bank of Romania's 2.8% estimate for quarter-end. We see core inflation coming down in the next few months, towards the 3.5% area, but not below 3.0% as in the NBR’s projections.
Inflation (YoY%) and main components (ppt)
As mentioned in our previous note, the risk balance looks to be pointing towards marginally higher inflation versus our current forecasts. However, to the many “ifs” influencing the inflation forecast we can now add a potential downside factor. This relates to possibly lower-than-expected economic activity in the first quarter of 2021, marked by a resurgence of coronavirus infections and a new set of restrictive measures. We are therefore maintaining our 3.3% year-end inflation forecast.
Policy-wise, today’s data shouldn’t change anything in the central bank’s stance. We expect the key rate to stay unchanged at 1.25% for the rest of the year. After last month’s long-expected upward adjustment in the EUR/RON, stability should prevail in the FX space as well. In the bond space, the central bank’s approach will likely stay unchanged, aimed at containing excessive volatility during sell-offs. Hence, secondary market purchases should remain limited and used more as a signalling function to preserve market functionality.
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