January CPI showed less upside pressure than we and the market expected, rising 0.1% m/m and accelerating to 5.2% y/y. On the monthly level, food prices were the main driver, as the seasonal uptick was accompanied by a changing VAT framework (5% VAT replacing 0% for some food items, as part of the alignment with EU regulation). The effect was also visible in some other items, such as pharmaceuticals. As expected, clothing and footwear prices worked in the opposite direction, courtesy of the ongoing sales season. CPI ex-food & energy accelerated to 2.1% y/y, still suggesting ongoing weak demand-side pressure. We expect inflation to peak in February, before starting to subside, with the base effect reverting from March (2pp VAT hike from Mar-12) onwards. Our take remains the same. We do not see the CNB acting on the inflation readings, given the accommodative outlook. We thus see the CNB pursuing its current tactics and balancing between the current high liquidity and exchange rate stability. The key anchor to such a policy remains a supportive fiscal policy, in order to mitigate external risks.

Coming to the fiscal side, the MoF this week gave a first glimpse of the budget revision, with the government communicating that it would slash GDP growth expectations to 0.7% for 2013 (remaining overly optimistic, in our view), which they expect to have a negative effect of approx. 0.4% of GDP on the revenue side. To offset this, the PM announced that they would decrease public sector wages by 3% from March to keep the fiscal targets intact. We see this as a move in the right direction, as it gives a more viable outlook to the 2013 budget and should be supportive of the upcoming (and important) Eurobond financing, as the MoF picked arrangers for USD 1.5- 2.0bn in issuance on the US market, which they are expected to tap by the end of 1Q13. Eurobond yields thus additionally increased up to 15bp on the long end, as investors are positioning ahead of the placement.

Source: bne