January 8, 2019 / 4:39 PM / 5 months ago

UPDATE 2-Romanian bank governor warns new tax could affect policy flexibility

(Updates with Governor Isarescu’s comments)

BUCHAREST, Jan 8 (Reuters) - Romania’s central bank governor said on Tuesday a “reckless” new government tax would make monetary policy less efficient, after having hailed a calmer outlook that allowed the bank to keep the benchmark interest rate on hold.

All analysts polled by Reuters had expected the bank to keep its benchmark at 2.50 percent.

Governor Mugur Isarescu said inflation would remain slightly below the bank’s 1.5-3.5 percent upper target range in the short term, and that the 2019 outlook looked calmer.

However, a surprise tax of banks’ financial assets introduced by the Social Democrat government via emergency decree in late December will complicate monetary policy decisions.

Banks will pay a progressive tax of 0.1-0.5 percent of assets if money market rates exceed 2 percent.

The central bank’s main task is to keep inflation down while preserving financial stability. But any potential rate increases to rein in inflation or stem capital outflows to prevent a weakening of the leu currency, would lead to a rise in market rates and consequently tax levels, which would damage banks and impact stability.

“It is not the bank’s independence that will be affected, but the efficiency and flexibility of its monetary policy,” Isarescu told a news conference.

He said the bank was surprised by “the folly” and added its experts were still working on an impact assessment, which would add up to “billions of euros”.

“As a country we will lose some extraordinary advantages. Inflation is under control, interest rates did not explode, we continue to have economic growth and a relatively free and stable exchange rate. Trust is hard won and it is lost quickly, through a reckless measure,” he said.

A base effect, higher energy prices and consumption-friendly wage hikes drove annual inflation in the import-reliant European Union state to multi-year highs of around 5 percent last year.

Policymakers raised the key rate three times by 75 basis points in all, with the latest hike in May 2018.

Since then, it has controlled liquidity in the market through repo and deposit tenders, which have helped keep market rates near its benchmark. Annual inflation fell to 3.4 percent in November.

The 3-and 6-month money market rates were quoted at 2.59/2.92 percent and 2.89/3.27 percent respectively.

“We foresee the policy rate unchanged at 2.5 percent throughout 2019 as economic growth will slow down and inflationary pressures will ease,” analyst Eugen Since of BCR said in a note.

“A key question in 2019 is how the central bank would respond to potential weakening pressure on the leu coming from twin deficits and exacerbated by the government’s preference for low interest rates.”

By 1550 GMT, the leu was 0.2 percent weaker versus the euro, and bluechip shares were down 2.6 percent. (Reporting by Luiza Ilie; Editing by Alison Williams)

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