Romania's central bank, which earlier today cut it policy rate for the fourth time in a row, said its latest inflation report foresees a decline in inflation to all-time lows in the first half of 2014 due to the ongoing transitory impact of this year's bumper harvest and a lower tax rate on some bakery goods.
The National Bank of Romania (NBR), which cut its policy rate by 25 basis points to 4.0 percent for total cuts this year of 125 points, said the latest inflation projection, to be released on Nov. 7, shows a "temporarily steeper fall over the coming months" after which inflation would remain inside the bank's tolerance band and around the 2.5 percent target until the end of the forecast horizon.
Romania's inflation rate fell to 1.88 percent in September from 3.67 percent in August with the average annual rate falling to 4.8 percent from 5.1 percent.
In August the NBR lowered its 2013 inflation forecast to 3.1 percent from 3.2 percent and separately the International Monetary Fund (IMF) today forecast inflation to end this year around 2 percent. The NBR targets inflation of 2.5 percent, plus/minus one percentage point.
"The latest macroeconomic data point to faster disinflation attributed to the significant decline in food prices as a result of the bumper crops, the cut in the VAT rate for bread and some bakery products and the fading away of the negative base effect manifest in 2012," the NBR said, adding the persistent negative output gap and improved inflation expectations also played a role.
The bumper crops has helped boost exports and the overall economy, contributing to a substantial improvement in the current account deficit and improving industrial production, the bank said.
At the same time, domestic demand is improving modestly and should continue to improve but loans to the private sector are still negative and the bank said there was still room for banks to lower lending rates for companies and households to revive lending and restore confidence.
Romania's Gross Domestic Product expanded by 0.5 percent in the second quarter from the first, for annual growth of 1.5 percent, down from 2.2 percent in the first quarter.
The IMF and the European Commission completed their visit to Romania today, held to review the standby-agreement with the IMF.
The IMF revised upwards its forecast for Romania's economy to expand 2.2 percent this year, up from its previous 2.0 percent forecast, and then remain flat in 2014 for the same 2.2 percent growth as the drivers of growth switch from net exports to domestic demand and in particular investment that is expected to rise as the EU funds absorption accelerates.
In 2012 Romania's economy expanded by only 0.7 percent.