As economic growth in CEE is becoming firmer and the labor market tighter, the period of deflationary threats is over. While we see inflation undershooting the targets this year in all CEE countries except for the Czech Republic and Serbia.
The situation will change next year and the inflation rate will be hovering above the target almost everywhere. There is no reason for panic, given that inflation will stay below the upper boundary of the target range. The only outlier is Romania, where inflation will jump in 2Q18 above the upper boundary (to 3.7%).
In Romania inflation will jump in 2Q18 above the upper boundary (to 3.7%), due to the base effect related to the cut of TV taxes in 2017.
However, the spike is expected to be temporary and inflation should slightly ease in 2H18. Except for the Czech National Bank, central banks are expected to remain calm and avoid any overreaction to higher inflation (via premature tightening). This is especially the case for Hungary and Poland, where core inflation remains subdued and central banks will tolerate inflation staying above the target for a longer time before considering any tightening.
Romania: We have revised upwards our inflation forecast to 2.2% y/y in December 2017 (+0.3pp) and 3.1% in December 2018 (+0.2pp) after incorporating the effect of stronger increases in administered energy prices and the new excise tax on car fuels.
Inflation will exceed the upper limit of the NBR’s target in 2Q18 at 3.7% y/y, before decreasing gradually in 2H18. A base effect associated with the cut in the VAT rate in January 2017 and the elimination of a series of non-fiscal taxes in February 2017 will be an important driver for the pickup in y/y CPI growth at the beginning of 2018.
While strong household consumption has had little effect on the inflation rate so far, the situation could change in the future and an increase in core inflation remains a risk. It remains to be seen whether the NBR will look through this substantial increase in headline inflation, considering it an outcome of factors outside its sphere of influence (mainly regulated prices).
Depending on second round effects on core inflation, talks about a hike in the key rate could gradually emerge within the MPC. However, first we expect the NBR to concentrate on a further reduction of the interest rate corridor and leave further tightening discussions for 2018.
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