BUCHAREST: Romania's central bank kept its benchmark interest rate unchanged at a record low of 1.75 percent on Friday, striking a balance between the twin impacts of negative inflation and the government's fiscal expansion plans.
Central Bank Governor Mugur Isarescu said inflation would return to positive territory in the first quarter, but that it would be lower than initially forecast.
Consumer prices fell a greater-than-expected 0.7 percent on the year in November and were in negative territory throughout 2016 as value-added tax was cut and energy prices fell.
The central bank, which targets inflation at 1.5-3.5 percent, had estimated it at -0.4 percent at the end of 2016, jumping to 2.1 percent by the end of 2017. "The most recent assessment reconfirms the outlook of inflation returning to positive territory in the first quarter of 2017," Isarescu told reporters. "The range in which annual inflation is expected to be is, however, lower (than forecast)."
He said risks to the inflation outlook stemmed in part from "the post-election situation", adding that it was too early to say how the government's 2017 budget plan, which has yet to be drafted, might influence future monetary policy decisions.
The leftist Social Democrats returned to power in elections in mid-December after campaigning on the promise of wage and pension hikes, and the government they head was sworn in this week. "The governing programme has many aspects which point to a budget structure with many novelties," Isarescu added.
He said other risks to the inflation outlook stemmed from external factors such as concerns over euro zone growth, European banking issues and negotiations over Britain leaving the EU. The central bank will release minutes of Friday's policy meeting next week and its new inflation forecasts in February.
ING Romania chief economist Ciprian Dascalu said in a note that while approval of the 2017 budget was still pending, "likely significant stimulus versus 2016 might call for a slightly hawkish tone."
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