Central bank keeps key rate flat

According to the press release the disinflation process will resume in 2H11, once the first-round effect of the VAT hike fades, but inflation will enter the targeted range only in 2012. This suggests that the new official inflation forecast for 2011 (due on Thursday at the presentation of the quarterly Inflation Report) might be above the target (3%±1pp). At the same time NBR mentions the persistence of risks and uncertainties related to the calendar and magnitude of administered price adjustment. This is in line with our scenario which points to significant inflationary pressures in the next quarters coming from potential hikes in the administered price of energy and public transport at the request of the IMF and EU.

The recent appreciation of the RON is seen as triggered by an increase in volatile capital inflows which is likely to intensify in the future. This will generate some constraints on the dosage of the monetary policy tools, according to NBR.

We see the key rate at 6.25% in December 2011 and 6.75% in June 2012 due to higher inflationary pressures and a possible fiscal slippage ahead of 2012 elections.

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