IMF: Romania Needs No Monetary Policy Tightening After VAT Raise

Romania’s recent increase in the value added tax rate will have a temporary negative impact on inflation, which should dissipate in the second half of 2011, and the central bank doesn't have to raise the rates, the International Monetary Fund said Wednesday.

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"The VAT increase will have a temporary effect on inflation and we expect it to dissipate in the second part of 2011. We don't think the central bank has to change its monetary policy because of the VAT increase," said Jeffrey Franks, IMF mission head to Romania.

Speaking in a news conference, Franks said the central bank should remain vigilant regarding possible second-round effects of the sales tax increase, but mentioned these effects, if any, will be less pronounced compared with the first-round ones.

"We don't expect second-wave effects at present," Franks said.

"We estimate the inflation will peak in the next months, but it should slow down to 3% by the end of next year," he added.

Romanian authorities recently raised the VAT level to 24% from 19%, in a move aimed at boosting revenue and containing the budget deficit to below 6.8% of the gross domestic product.

Following the measure, the central bank decided to leave its key rate unchanged at 6.25% a year and announced plans to limit possible second-wave effects triggered by the higher VAT rate.

The central bank is due to release its latest monetary policy decisions later Wednesday and analysts expect no changes in the key rate.

According to central bank estimates, Romanian inflation would pick up to around 8% in 2010, from 4.4% end-June.

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