VAT Hike, Floods Seen Pushing Romanian YE Inflation At 8%

Romania’s government has raised the value added tax level to 24% from 19% from July 1 to boost revenue and reduce the budget deficit. The move aimed to compensate for a planned 15% cut in pensions, which was ruled unconstitutional by the country’s highest court.

According to Raiffeisen analysts, the leu’s depreciation against the euro and the authorities’ decision to cancel heat subsidies for household will also have a negative contribution to inflation in 2010.

Given the expected rise in inflation, the central bank is unlikely to ease its key monetary rate policy further this year. On the contrary, the bank could decide to increase its key rate above the current level of 6.25%, the report noted.

Romania’s central bank Tuesday kept its key rate unchanged at 6.25%, as expected, while the minimum requirements were maintained at 15% for Romanian leu-denominated liabilities and at 25% for hard-currency liabilities.

Romanian consumer prices rose 0.15% on the month in May, but the annual inflation accelerated to 4.4%.

The central bank targets an annual inflation of 3.5% in 2010, plus/minus one percentage point.