The NBR expects the inflation rate to reach a level of 4.3% in Q1, climb to 4.7% in Q3, settle at 4.6% by the yearend, and stay there in Q1, 2008, as well. In addition, according to the latest quarterly report on inflation, next year the rate of inflation is projected to decrease to a level of 4.1%.
This is the first time the central bank has published the exact projected levels of inflation. NBRes board of governors is due to meet on March 26th, for a new monetary policy evaluation, and then on May 2nd for discussion on the inflation report for the next quarter.
Unlike other central banks in the region, the NBRes board is not yet willing to reveal the voting structure for decisions related to interest rate movements or to have any minutes published from meetings.
"Until we see a better NBR-market agreement, we will not publish the minutes," said NBR governor, Mugur Isarescu.
The NBR considers the greatest risk to a continued disinflation is "an increase in wages uncorrelated with the labour productivity". Isarescu does not fear private sector salary increases, but sees "the grave danger" as residing in the budgetary sector, given the significant needs particularly in the heath care and education sectors.
According to the NBR estimates, included in the latest quarterly report on inflation, "it is possible" that in many sectors of the economy companies registered a high profitability rate in 2006, which would allow them to not transfer salary raises into prices.
Another risk to disinflation is the budget deficit, which is expected to widen even further than the announced target of 2.8% of the GDP.
Speaking on possible risks, he also mentions a widening gap between savings and investments, as well as uncertainties linked to the future development of the exchange rate.
According to the Report on inflation, the NBR based its decision to cut down the interest rate on the need to relatively narrow down the yield spread between the domestic market and international markets, which it sees as one of the main factors spurring the inflow of volatile capital and financial loans.
On the other hand, the NBR considers a "cautious" approach is necessary in cutting down the interest rate, given the continuing inflationary pressures regarding supply.
"The highest inflationary potential is still related to controlled prices (...)," according to the NBR. The NBR also upwardly revised projections related to inflation generated by the increase in volatile prices, both for 2007 and 2008. The higher excises on tobacco products are yet another factor that may trigger hikes in price this year.
Nevertheless, the central bank has come to the conclusion that inflation outlooks for future monetary policy application (eight quarters) have improved, compared with the previous prognosis.
Major risks to disinflation
An increase in salaries that is not be in line with labour productivity; the NBR is worried about the pace of salary raises in the budgetary sector
Registering a budgetary deficit even higher than the announced target of 2.8% of GDP
A greater imbalance between savings and investments
Uncertainties related to the future trend of the exchange rate
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