The sluggish domestic demand will reflect over the GDP contraction by 2.5% in 2010. UniCredit had predicted initially a 0.9% economic contraction.

The inflation rate will shoot up following the VAT hike by 5%, widely above NBR’s target range for 2010. The inflation rate will rise to 8% in August, according to UniCredit. “For end 2010, the projection is 7.7% and we expect the inflation rate to slow down in 2011 and fall back to 4% at the end of the year”, the bank said.

The report suggests the central bank’s monetary easing has ground to a halt on a short term and is likely to remain that way until the second half of next year. “We expect the National Bank of Romania to leave monetary policy rate at 6.25% by the end of 2010, although the inflation rate could exceed this level on a short term”, UniCredit analysts said.

As for the fiscal policy, the revised outlook envisages that the austerity measures will be sufficient to narrow the budget gap near the level agreed with the IMF (6.8% of GDP for 2010). “However we still see risks of missing deficit targets, should the implementation of the austerity package and of additional structural measures (boost efficiency, reform of the pension system and reorganization of the public sector) be delayed”.