Romania Ctrl Bk To Leave Key Rate Unchanged After VAT Hike - Analysts

Romania’s central bank is bound to leave its key rate unchanged at 6.25% during its monetary policy meeting June 20, as the government’s recent decision to increase the value added tax level has made a rate cut highly unlikely, analysts said Monday.

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The central bank cut its key rate in four steps this year, to 6.25% from 8% at the end of 2009, while keeping the minimum reserve requirements unchanged at 15% for Romanian lei and at 25% for hard currency.

Over the course of 2009, the central bank has lowered the key monetary policy rate by 225 basis points.

Lucian Anghel, chief economist at Banca Comerciala Romana, or BCR, estimates the central bank is not likely to cut its key rate at the Wednesday meeting.

"If it weren't for this VAT increase, I would have anticipated a rate cut of 25 basis points, most likely the last reduction this year," Anghel said.

"However, the higher VAT changes things completely and it's highly unlikely that the rate will be lowered now," he added.

According to Anghel, the central bank will probably miss its inflation target for 2010 as well, of 3.5%, plus/minus one percentage point.

In fact, all analysts polled by MEDIAFAX predict the VAT increase will put further inflationary pressure on the Romanian economy.

However, Florian Libocor, chief economist with Romania's second biggest bank BRD-Societe Generale (BRD.RO), said the central bank could cut its key rate by one quarter of a point to 6% Wednesday.

"We've considered a scenario in which the monetary policy rate would fall below 6% by year-end. The VAT increase eliminates, at least in theory, this scenario, so the central bank will probably operate one more rate cut, of 25 basis points," Libocor said.

He said the economic policies mixture is expected to balance out and the government's fiscal measures will be accompanied by proper monetary policy decisions so prices can stabilize.

"The monetary policy will not support inadequate fiscal policies, but it will correct them," Libocor mentioned.

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