Financial Policies and Results

The National Bank of Romania keeps the monetary policy interest rate at the current annual level of 1.75%.

Mihai Pelin, 05.08.2015, 13:13

Bucharests Central Bank has decided to keep the monetary policy interest rate at the historic low of 1.75% a year. The banks governor Mugur Isarescu says the decision was also influenced by the impact on prices of the cut in VAT for food that came into effect in June. The measure taken by the bank will lead to a negative inflation rate over the next three quarters, said the Central Bank governor:

Mugur Isarescu: “The disinflationist shock caused by the first round of the VAT cut, which saw a drop from 24 to 9% in the VAT for food products, which account for some 30% of the consumer goods and services basket, was greater than expected. Statistical data show a reduction in the price of food products subject to the VAT reduction compared to the previous month.

Despite this price dynamics, the National Bank governor has ruled out the danger of deflation in Romania, on account of inflationist pressures caused by the rise in public sector salaries and the fact that consumption is growing. With regard to the new tax code, Mugur Isarescu called for the fiscal relaxation to be introduced “at the tight time and in a balanced way, arguing that the implementation of the code as of January 1st 2016 is not sustainable.

The head of the International Monetary Fund delegation to Romania, Andrea Schaechter, and the Funds Resident Representative for Romania and Bulgaria, Guillermo Tolosa, have recommended to the authorities in Bucharest to slow down the implementation pace of the measures laid down in the new tax code and the expenditure plans, so as to be able to achieve a gradual reduction in public debt, ease the tax burden and finance new projects. The two officials have also suggested to the government to resize its proposed tax and duty cuts to preserve the countrys macroeconomic stability.

Prime Minister Victor Ponta says concrete results can be achieved through tax easing, efficient management, fighting tax evasion and measures to stimulate the economy. He pointed out that budget returns have increased since the beginning of the year and that a set of measures with a positive impact on the state have been adopted, such as a decision not to tax companies reinvested profit, the VAT cut from 24 to 9% for food products and the 5% cut in social security contributions.

Finance minister Eugen Teodorovici believes the gradual introduction of tax easing measures will not have the expected results as far as the economy is concerned. In his opinion, the tax code bill, which President Klaus Iohannis has sent back to Parliament for re-examination, will not see any changes. He believes Romania must take advantage of the situation in the region and implement these “courageous measures. Such measures have included the VAT cut from 24 to 19%, the introduction of a construction tax for structures other than buildings and the elimination of an additional excise duty on fuel.