Inflationary pressures still low in June

The prices of food products fell 0.1% m/m due to a favourable seasonal effect and the contraction of households demand. Non-food goods went up by 0.2% m/m following the increases in the prices of fuel, books and newspapers. The tariffs of services advanced by 0.6% m/m as the monthly depreciation of the RON translated immediately into higher tariffs for phone and air transport services.

Following the recent hike in VAT (+5pp to 24% beginning with July), we raised our forecast for December 2010 inflation rate to 8.5% y/y. Our scenario is consistent with limited second round effects of the VAT increase on the consumer prices, considering the decline in households purchasing power and the stability of the RON. Central bank could maintain the key rate flat at 6.25% in 2H10. Some cuts in minimum reserve requirements are not ruled out in the next quarters as the private sector of the economy still needs additional support to overcome the severe effects of the economic recession.