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May 24, 2022

VAT increase forces BNR to keep key interest rate at 6.25 pc

Analysts consider the 3.5 pc inflation target set for this year cannot be met anymore.

The Board of the National Bank of Romania (BNR) tomorrow will keep the key interest rate steady at 6.25 pc, as it is no longer possible to further relax the monetary policy because of the inflationist pressure put by the VAT increase to 24 pc, according to most analysts interviewed by Mediafax. Financial experts anticipate the cash reserve ratio will be kept at its current level for both RON and foreign currencies, but changed their opinions about the evolution of the monetary policy rate this year.

Chief-economists of BCR, ING Bank Romania and UniCredit Tiriac Bank anticipate BNR will keep the key interest rate at 6.25 pc on Wednesday and believe Romania lost all chances to meet the inflation target set for this year, of 3.5 pc plus/minus 1 percent point.

“Without this VAT increase, I would have foreseen a drop of the policy rate by 0.25 percent points – the last this year. The decision to increase VAT changes things and I believe nobody will think anymore about cutting the interest rate, rather it will stay unchanged,” said chief-economist of BCR, Lucian Anghel. He explained it will be the VAT hike, rather than a soaring demand, that will fuel the significant increase of inflation, and this is why he does not believe BNR will need to keep a buffer between monetary policy and inflation, which was around 2 percent points this year so far. “Additionally, 12 months from now, this impact upon inflation that will follow the VAT increase will dissipate. Hence, I would not see it necessary to increase the monetary policy rate,” the BCR chief-economist explains. He ruled out the possibility to stick to the inflation target set by the Central Bank for this year, but said 2011 will have better prospects, as it will be possible to keep the increase of consumer prices within the interval set by BNR.

The chief-economist of UniCredit Tiriac Bank, Rozalia Pal believes the key interest rate will be kept at 6.25 pc until the end of this year. “Although arguments exist, I do not believe BNR will decide a key interest increase, because it must preserve the long-term coherence of monetary policy,” Pal explained. During 2011, inflation will start to subside, due to the base effect and a decrease of demand, as consumption will be severely hit. The chief-economist of ING Bank Romania, Nicolaie Chidesciuc believes the country might have reached the end of the monetary policy relaxation cycle. He anticipates crediting – i.e. demand for loans and substantial growth – will resume only in 2012.

Libocor: Key interest rate will drop to 6 pc

The chief-economist of BRD, Florian Libocor is the only expert who estimates the Central Bank will further cut the key interest rate by 0.25 pc on Wednesday and will keep it at this level until the end of the year. “I took into account a possible cut of the monetary policy rate under 6 pc at the end of this year. The decision to increase VAT cancels this scenario, at least in theory. Thus, (the Central Bank) will probably operate only one cut, now (Wednesday), by 25 base points,” Libocor said. He mentioned that, in the case of BNR, the goal is to secure the stability of prices, with the main instruments being the key interest and the exchange rate. Furthermore, he anticipates that the mix of economic policies will be rebalanced in Romania, while fiscal measures will go in hand with adequate monetary policy decisions, in order to achieve price stability.

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