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UPDATE 1-Romania's central bank holds key rate at 1.75 pct
July 3, 2017 / 11:02 AM / 3 months ago

UPDATE 1-Romania's central bank holds key rate at 1.75 pct

(Adds analyst comments, details)

BUCHAREST, July 3 (Reuters) - Romania’s central bank kept its benchmark interest rate unchanged at a record low 1.75 percent as expected on Monday in a wait-and-see approach to wage hike pressures and fiscal uncertainty.

Romania’s ruling Social Democrats announced a tax overhaul for 2018 in June, ditching a flat 16 percent tax on income and profit that has attracted investment into the European Union’s fastest-growing but least-developed economy.

The government’s planned changes include a mix of cuts to existing taxes, introducing new levies and postponing a value added tax cut by one year. Tax measures are doubled by promises to hike public sector wages, the minimum pay and state pensions.

The plans were announced without prior consultation or an impact assessment, and the leu, debt yields and stocks fell at the end of June. It was unclear whether the government would actually change taxation in time for 2018.

Meanwhile, Romania was the EU’s fastest-growing economy in the first quarter. Romanian inflation stood at 0.6 percent at the end of May.

The central bank forecasts inflation will reach 1.6 percent at the end of the year, but that wage hikes and strong domestic demand will push it to 3.1 percent by the end of 2018. It targets inflation at 1.5-3.5 percent this year and next.

Eight of ten analysts polled by Reuters expect the bank to keep its key interest rate unchanged at the end of the year.

The central bank has signalled that any first change to monetary policy may come not via its key rate but by narrowing the gap between its lending and deposit rates, which would in turn affect interbank rates.

“Looking ahead, we think that core price pressures will soon start to build,” Capital Economics said in a research note, adding they expected policymakers to raise interest rates towards the end of the year.

“The economy is now operating at full employment. Accordingly, the combination of loose fiscal policy, double-digit wage growth and accelerating credit growth – coupled with the unwinding impact of previous VAT cuts – will push inflation up sharply in the coming months.”

The Romanian leu inched 0.1 percent lower against the euro to 4.5605 at 1045 GMT.

Governor Mugur Isarescu is expected to provide details on Monday’s decision from 1200 GMT. (Reporting by Luiza Ilie; Editing by Raissa Kasolowsky)

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