Romania Ctrl Bk: VAT-Induced Inflation Has Corrective Role

„An inflation which is not monetary doesn’t require a reaction from the central bank. Should we intervene (to ease inflation), the correction would no longer take place,” Isarescu told reporters.

Romanian government recently raised the VAT level to 24% from 19% to offset the annulment in court of a planned 15% cut in pensions and to curb the budget deficit.

According to Isarescu, the Constitutional Court’s decision to annul the pension cuts may be interpreted as a signal that any measure to slash public spending involves raising the inflation.

The International Monetary Fund recently revised its target on Romania’s annual inflation to 7.9% in 2010 from 3.5% previously, following the enforcement of the higher VAT level.

End-May, Romanian inflation was 4.4%, from 4.2% a month earlier.