Thursday, November 4, 2010

Romania Central Bank Raises Inflation Forecast on Effects of VAT Increase

By Irina Savu and Andra Timu - Nov 4, 2010


Romania’s central bank raised its inflation prediction for this year and next because of the effects of the government’s increase of a value-added tax to meet the terms of an international bailout loan.

The inflation rate will end the year at 8.2 percent and 3.4 percent in 2011, Governor Mugur Isarescu told reporters in Bucharest today. In August, the central bank forecast annual inflation of 7.8 percent in December and 3.1 percent at the end of 2011.

“We aren’t changing the inflation target, there’s no reason to do that for this year,” he said. The central bank’s consumer-price growth target is 3.5 percent, plus or minus 1 percentage point, this year, 3 percent in 2011 and 2012 and 2.5 percent from 2013 as it seeks to meet euro-entry criteria. Romania aims to adopt the currency from Jan. 1, 2015.

The bank left its monetary-policy rate unchanged at a record-low 6.25 on Nov. 2 for a fourth meeting as policy makers stuck to a “prudent stance” because of inflation concerns triggered by the VAT increase and the government’s plan to cut the budget deficit and fire state workers.

‘Feasible’

Isarescu said he is “confident” inflation will slow to the 2012 target which he called “feasible.” Reaching the target is “essential” for the central bank’s credibility, he added.

The government, which took a 20 billion-euro ($28 billion) loan from the International Monetary Fund and the European Union to stay afloat, increased the value-added tax to 24 percent from 19 percent and cut public wages by 25 percent from July until the end of this year to narrow the budget deficit to 6.8 percent of gross domestic product this year and 4.4 percent next year. The VAT increase boosted inflation to 7.8 percent in September, the fastest pace in more than two years.

“We estimated the impact of the increase in the VAT at 2.4 percentage points, but there are certain elements such as heating prices which will produce an impact probably in October or November,” Isarescu said. “We cannot say exactly, and that’s why we think the impact of the increase in the VAT could be even larger than 2.4 percentage points.”

Inflation will probably accelerate beyond 8 percent by the end of this year, IMF Mission Chief to Romania Jeffrey Franks said on Nov. 1 after a two-week review of the country’s progress under the bailout.

To contact the reporters on this story: Irina Savu in Bucharest at isavu@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez in Prague at jagomez@bloomberg.net

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