Erste Group Research

Short note | Fixed Income | Romania

10 September 2014

Prices down again in August

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Monthly prices fell 0.3% in August, putting the annual reading down to 0.8% from
almost 1%. We were in agreement with the market consensus in looking for prices
to pick up slightly to 1.1% y/y in August. We stick to our year-end forecast of 2.2%,
but risks are biased to the downside.
Dumitru Dulgheru
Senior Analyst:
+4021 3126773 / ext 10433
dumitruteodor.dulgheru@bcr.ro

Headline inflation and CORE 2 adj.

7

CPI
CORE 2 adj.

7
6

Jun-14

-1

Aug-14

-1

Feb-14
Apr-14

Oct-13

Dec-13

Apr-13

Jun-13
Aug-13

Feb-13

Dec-12

Aug-12
Oct-12

Note: CORE 2 adjusted: CPI less administered,

volatile, alcohol and tobacco prices
Source: INS, BCR Research

Vegetables and fruits were again the main downward drivers of headline
inflation in August, as those two heavyweight items account for almost
6% of the consumer basket in Romania (the impact on the monthly
inflation from those food products was -0,3%). Food prices dropped a
monthly 0.9% in August, while in annul terms they were down almost 2%.
The decline in food prices was backed by fresh agricultural products from
local production, along with low-priced food imported from the EU.
Prices of non-food products were roughly flat compared to July, held
down by cheaper fuels (which account for more than 8% in the total
consumer basket). Services were the only area to post a monthly rise in
August (0.2%), whereas the annual reading was up 2.8%. The
depreciation of the FX rate (0.3%), which is passed onto the phone bill,
was the only upside driver of service prices in August. CORE 2 inflation
a preferred gauge of the central bank remained negative for the
eleventh consecutive month in August, a sober reminder of the weak
domestic demand.
The significant impact of low inflation in the EU, the persistent negative
output gap and sluggish lending are the main elements keeping inflation
subdued. We continue to see inflation quickening towards 2% at the end
of the year, as the base effect wears off and local production of
vegetables and fruits passes its summer peak (however, the trend
reversal in food prices could be rather soft if Russia holds on to banning
food imports from the EU). As we soon enter the final stretch of the
presidential election campaign, the government has decided to push back
the 3% hike in natural gas prices scheduled for October. For the time
being, inflation risks look biased to the downside.
Market implications:
With inflation still hovering well below the lower bound of the inflation
target (1.5%), adjusted CORE 2 lingering in negative territory and an
economy that recently slid into technical recession, there is space for
additional monetary easing. We see the central bank cutting the key rate
to 3% at the next MPC (end-September), while continuing to strengthen
the monetary policy transmission (money market rates closer to the key
rate). Bond yields will be driven mainly by geopolitical, fiscal and political
events related to the local presidential election and less by monetary
policy. We continue to see yields drifting higher in the fourth quarter of
this year, while we see a limited impact on asset prices from the
upcoming QE in the Eurozone (especially if the asset quality review turns
out poorly). Moreover, the leftist cabinet is likely to let the current
precautionary arrangement with the IMF run out, as in any case the
bail-out arrangement reaches its end date next year.

Erste Group Research Short note

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