Romania Keeps Key Rate Unchanged to Assess Tax Cuts’ Impact

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Romania kept borrowing costs unchanged for a second meeting as the central bank warned that planned tax cuts risk overstimulating consumption in what’s already the European Union’s fastest-growing economy.

The bank left its benchmark interest rate at 1.75 percent Tuesday, matching the predictions of all 16 economists in a Bloomberg survey. Governor Mugur Isarescu told reporters in Bucharest that spare capacity in Romania’s economy will probably disappear quicker than previously predicted if all the tax reductions are passed, though he saw no sign of overheating yet.

Policy makers are reacting to fiscal easing by the government of Victor Ponta, who’s battling charges including money laundering as his party prepares for elections next year. While deflation set in in June, the central bank halted a rate-cutting cycle the next month and may consider raising borrowing costs because of the tax reductions and increases in state wages, Deputy Governor Bogdan Olteanu warned Monday.

“Concerns center on the idea that falling consumer prices will translate into a sharp rise in real incomes, triggering much faster consumption growth,” analysts at London-based Capital Economics Ltd. said by e-mail. “This in turn would close the economy’s output gap more quickly, and could lead to a build-up of inflation pressures over the medium-term.”

The leu was little changed against the euro after Isarescu’s comments, leaving it 1.5 percent stronger this year, data compiled by Bloomberg showed.

‘Direct Impact’

The tax cuts, which may be expanded in January, have already torpedoed talks with the International Monetary Fund and the EU over a rainy-day loan accord. Isarescu reiterated concerns that the fiscal policies could cause imbalances.

“Planned fiscal changes will have a direct impact on Romania’s macroeconomic stability and on the policy mix agreed with international partners,” he said Tuesday.

The central bank, which maintained reserve requirements for leu and foreign-currency deposits, will release updated quarterly inflations forecasts on Aug. 6. Price growth turned negative in June for the first time since the fall of communism and won’t reach the targeted level for at least three quarters, according to Isarescu.

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