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ING: Romanian Ctrl Bk May Rise Key Rate To 7% By Yearend

Romania’s central bank could raise the key monetary policy rate to 7% a year from the current 6.25% in the last two Board meetings of 2010, ING Bank Romania said in a report.
ING: Romanian Ctrl Bk May Rise Key Rate To 7% By Yearend
09 iul. 2010, 15:31, English

On June 30, Romania’s central bank kept its key rate unchanged at 6.25%, as expected, after the government raised the sales tax by five percentage points to 24%.

ING analysts believe the central bank will try to limit the inflation increase by keeping the interbank rates close to or higher than the key rate, thus protecting the leu to some extent against weakening.

The central bank noted after its last Board meeting that the increased value added tax will immediately trigger a significant rise of consumer prices and that it will act „to limit the second-round effects of this measure and firmly anchor inflation expectations at low levels.

ING analysts note that the fight against second-round effects of the VAT hike usually entails increasing the key rate and/or strenghtening the leu.

The Romanian Constitutional Court rejected, in May, the government’s intention to cut pensions by 15%. As a result, the government decided to raise the VAT level in order to keep the budget deficit below 6.8% of the gross domestic product.

ING expects the central bank to maintain the key rate in its August 4 meeting at 6.25%, since there will be no inflation evolution data available in July.

But in the last two meetings planned for 2010, in September and November, the central bank might raise the key rate, ING said.

Furthermore, according to ING analysts, the central bank should set a „reasonable” inflation target for 2012, around 4%-5%, compared to the 3% target set for 2011.

ING changed its inflation forecast for this year, to 7% from 4.1% previously, and to 5.1% from 4.5% in 2011.

Romanian central bank officials have recently said the increase in the VAT rate will drive inflation up by three to four percentage points over the next period, up to 8%.

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