Romania’s disinflation gives hope for July rate cut

Romania’s headline inflation rate dropped from 5.9% in April to 5.1% y/y in May, coming well below the 5.6% Bloomberg median forecast as the regulated energy prices fell for the second month in a row, according to data published by the statistics office INS.

The core inflation also eased to 6.3% y/y in May from 6.7% y/y in April.

The steady disinflation, stronger than expected for the second month in a row, besides the core inflation dropping well below the monetary policy rate (7% since January 2023), supports expectations for a rate cut at the July 5 monetary board (there is no board meeting scheduled in June).

After the statistics office released the May inflation, Austrian group Erste revised its year-end inflation forecast to 4.0% y/y from 4.2% y/y and a 4.9% y/y official target of the central bank.

Erste analysts kept unchanged the core inflation forecast for December 2024 at 4.9%, as the unexpected May inflation figures were exclusively due to non-core items (energy prices).

“May inflation surprise cements our view for the first NBR rate cut in July by 25bp to 6.75%, and we expect the key rate to reach 6.0% by year-end,” the Erste Research note reads.

Erste analysts support their expectations on the disinflation surpassing the central bank’s expectations and, supplementary, the encouraging messages conveyed by the ECB’s recent rate cut.

“The National Bank of Romania (BNR) projected inflation at 6.0% by the end of the second quarter of the year (Q2 2024) in its May Inflation Report. Our preliminary estimate shows June CPI falling further to 4.7% y/y. The ECB rate cut in June should make NBR more confident about the timing of the easing,” argues Erste in its research note.

Detailed May inflation data show that food prices increased by 1.2% y/y, non-food prices by 6.4% y/y (energy prices dropped by 10.7% y/y), and the prices of services by 9.3% y/y.

On a monthly basis, consumer prices dropped by 0.1% m/m, dragged down by marginally lower food prices (seasonal effect) and 0.3% lower non-food prices (the natural gas price dropped by 8% m/m).

(Photo source: Juan Moyano/Dreamstime.com)