ING has thus lifted its inflation forecasts to 7% and mentions the fact that there are major risks over inflation, as Romania is also facing massive flooding from rain-swollen rivers, which could add another 1.2% to this year inflation rate and another 0.6% next year.

“If it thermal energy costs doubles, and we add the food price hike, another 2.4% could be added to the inflation rate and have a 9.4 – 9.5% rate at the end of the year”, said Nicolae Chidesciuc, senior economist at ING Bank Romania.

Fuel prices could also pose a considerable risk to the already swollen inflation, ING said in the report.

A high inflation rate could force the central bank lift its 2011 inflation target, and adopt “a reasonable one for 2012, such as 4-5% from 3% in 2011 – which is not realistic”.

Following central bank’s revision of the inflation rate for 2010 to 8% due to the VAT hike to 24%, ING expects the National Bank of Romania to increase the key rate to 6.75% in the third quarter and to 7% in the fourth quarter respectively.

ING also anticipates an increase in the monetary policy rate in the first quarter 2011 to 7.5%.

“We had to revise our moderately optimistic forecasts to a 3% GDP contraction in 2010, due to public wage cuts and VAT hike”, ING said.