Nov. 6 (Bloomberg) -- Romania’s central bank raised its inflation forecast for this year because of a planned increase in excise duties, as the European Union’s second poorest country sacrifices domestic demand to generate more budget revenue.

The Banca Nationala a Romaniei estimates year-end annual inflation of 4.5 percent, compared with a forecast for 4.3 percent in August, Governor Mugur Isarescu said at a news conference in Bucharest today. The bank kept unchanged its 2010 year-end inflation forecast at 2.6 percent.

The October collapse of Romania’s government threatens to stall the country’s economic program with the International Monetary Fund and delay the Balkan state’s recovery from its worst recession in at least two decades. Romania is relying on a 20 billion euro ($29.7 billion) loan from the IMF and the European Union to finance its current account and budget deficits.

The country’s political situation will probably delay the third installment of the IMF’s loan, Isarescu said today.

The central bank at its last meeting kept the monetary policy rate at 8 percent, the highest benchmark in the EU, to keep inflation under control and protect the currency after the country’s political turmoil prompted investor concern.

The leu lost 15 percent against the euro in the year through October, the sixth-worst performer of the 26 emerging market currencies tracked by Bloomberg in the period.

Investor Concerns

A declining currency may fuel inflation and threaten financial stability in a country reliant on foreign-currency loans. In October, the leu slid to 4.3501 against the euro, the weakest level since Jan. 13. Investors have speculated the central bank has been supporting the currency.

Prime Minister Emil Boc lost a no-confidence vote last month after his government’s coalition partner resigned to protest the dismissal of a minister. To date, lawmakers and President Traian Basescu have been unable to agree on a candidate to take over the premiership as the country prepares for presidential elections on Nov. 22.

Basescu today put forward a new candidate for the premiership after lawmakers rejected economist Lucian Croitoru. The president proposed Liviu Negoita, a mayor of a district of Bucharest and a member of Boc’s Liberal Democrat Party, to become prime minister, he said today in a live television broadcast.

Independent Preferred

Lawmakers have made clear they would prefer an independent for the premiership.

Inflation slowed less than analysts estimated in September to a two-year low of 4.9 percent from 5 percent in August and 9 percent a year earlier, limiting the central bank’s scope to cut rates. The bank targets a year-end inflation of 3.5 percent, plus or minus 1 percentage point.

Inflationary pressures are building, driven by a planned increase in excise duties from Jan. 1, a weaker leu and government policies potentially inflating prices, the central bank said in the statement on Nov. 3.

Romania’s economy contracted an annual 8.7 percent in the second quarter, the most on record, as consumption dropped and the global crisis forced the government to seek an international bailout. The bank has lowered the rate five times since February to soften the impact of the recession.

The country joined the EU together with Bulgaria in 2007 and targets euro adoption in January in 2015. The government has said it aims to enter the exchange rate mechanism, a precursor to adopting the euro, in 2012.

Central bank Deputy Governor Cristian Popa said on Oct. 16 that Romania will meet this year’s deficit target of 7.3 percent of gross domestic product, which was agreed with the IMF.

To contact the reporter on this story: Irina Savu in Bucharest isavu@bloomberg.net.

Last Updated: November 6, 2009 05:33 EST