Temporary spike in inflation rate

A hike in excise duties as of January 2010 was the main driver of this sharp increase in the level of consumer prices. Tobacco products (+13.9% m/m), electric energy (+4.2% m/m) and fuels (+3.4% m/m) went up considerably at the beginning of this year. On the other hand, services (+0.4% m/m) remained relatively calm, taking full advantage of the RON monthly appreciation (phone tariffs decreased by 1.9% m/m). The prices of food products increased by 0.4% m/m.

The annual inflation rate will resume its downward trend as of February and remain around the upper limit of the variation band (3.5% ± 1pp) in the following months. In a scenario consistent with limited second round effects of this substantial increase in consumer prices, low external pressures on the RON and strict fiscal and income policies (in line with the requirements of the IMF and EC), the central bank might continue the monetary policy easing cycle through 25bp cuts in the key rate. Domestic demand will remain subdued for quite a long period of time (unemployment is still on the rise and lending activities are sluggish). All of these factors could provide support for an extension of the monetary easing.