Muted inflationary pressures in May

The prices of food products fell 0.1% m/m due to the contraction of households consumption and a favourable seasonal effect. The consumer component of the Economic Sentiment Indicator released in May by the EC for the Romanian economy decreased to an all-time low, probably because of the deep cuts in public wages and pensions announced at the beginning of the last month. Non-food products went up by 0.2% m/m due to higher prices of fuel, medicines, books and newspapers. Services advanced by 0.5% m/m as the monthly depreciation of the RON led to higher phone tariffs (+1.1% m/m). The administered price of water and sewerage services continued to increase significantly faster than the overall CPI (+0.6% m/m).

We maintain our forecast regarding an annual inflation rate of 4% in December 2010. Along with the contraction of the domestic demand caused by the austerity package likely to adopted next week by the Parliament, this creates room for another 25bp cut in the key rate to 6% at the next monetary policy meeting on June 30. Government yields should resume their downtrend to 7% in December provided that the austerity program is implemented and the debt crisis does not intensify across Europe.

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