March 29 (Bloomberg) -- Romania's central bank, which cut its key interest rate twice in the past two months, may need to raise it again as the government boosts spending, Moody's Investors Service said in its annual report on Romania.
The National Bank of Romania cut its key interest rate by half a percentage point to 7.5 percent on March 26 after the annual inflation rate in February fell to a 17-year low of 3.8 percent. The Bucharest-based bank cut the rate three-quarters of a percentage point on Feb. 9 to 8 percent.
``Interest rates may need to reverse course and rise later in the year, particularly if the government spends all that is planned,'' Moody's said. ``A growing budget deficit in a period of rapid economic growth indicates that fiscal policy is strongly pro-cyclical. This is an especial concern given the large current account deficit and incomplete disinflation process.''
Romania's government plans to widen its budget deficit this year to 2.8 percent of gross domestic product from 1.7 percent last year to increase investment on infrastructure and bring the country closer to European Union standards after it joined the bloc on Jan. 1.
In October, Moody's raised Romania's credit rating one step to Baa3, the lowest investment grade, from Ba1, saying the country's accession to the EU should speed up economic recovery. The advance to investment grade followed similar moves by Standard & Poor's in 2005 and Fitch Ratings in 2004.
Moody's said in its report today that Romania's rating outlook is stable because of slowing inflation, ``strong'' economic growth and ``significant economic restructuring of the past few years.''
The service said, though, it is ``concerned'' about the current-account deficit, which it expects to widen this year from about 10.3 percent of GDP last year.
Romania's central bank has cited wage increases, government spending, oil prices and other factors as main threats to its year-end annual inflation target this year of 4 percent, plus or minus one percentage point.
The International Monetary Fund warned government budget calculations overestimate revenue and underestimate expenses. The IMF said the budget deficit could widen to as much as 3.8 percent of GDP this year, exceeding EU limits and pressuring inflation.
EU finance ministers also said in a ruling adopted in Brussels on March 27 that Romania's program to contain spending is ``insufficient and should be strengthened significantly,'' while the budget plan ``does not seem to provide a sufficient safety margin'' against breaching EU deficit rules.
Moody's said infighting between political parties in the ruling coalition adds uncertainty to fiscal policy this year.
The Liberal Party, led by Prime Minister Calin Tariceanu, and the Democratic Party, loyal to President Traian Basescu, have been increasingly fighting in public this year, prompting calls for early elections.
The Liberals have also threatened to oust the Democrats from the ruling coalition, a move that would make them more dependent in Parliament on the opposition Social Democrat Party or could trigger early elections.
To contact the reporter on this story: Adam Brown in Bucharest at.