February 12, 2019 / 2:27 PM / 6 months ago

UPDATE 2-Romanian bank tax is an attack at central bank independence, governor says

(Adds tax details)

BUCHAREST, Feb 12 (Reuters) - The Romanian central bank’s independence is under attack from a new bank tax tied to money market interest rates, Governor Mugur Isarescu told senators on Tuesday.

The Social Democrat government introduced the bank tax and other measures in December via emergency decree without impact assessment or public debate in a move to cap borrowing costs ahead of two election years.

But the tax, which caused a plunge in assets to record lows in December and January, is applied to banks’ financial assets on a progressive basis if three- and six-month money market rates exceed 2 percent.

“The decree is at the very least a failure,” Isarescu told senators on the budget-finance committee. “It’s practically a tax on monetary policy, it ties our hands.”

“In case of an attack against the leu currency, we will have to hike the interest rate. Which could kill banks. It is an attack to central bank independence.”

Any potential rate hikes 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 could affect banks and financial stability.

The bank has urged the government to uncouple the tax from ROBOR rates. In addition to the money market, the three and six months rates are used as a reference point for private loans.

The bank and the finance ministry are currently working on potential changes to the tax, with a next meeting set for next Monday. First Deputy Governor Florin Georgescu told lawmakers one option being considered was creating a new reference rate specifically for loans based on daily transaction averages.

Isarescu and the bank’s board were called in front of the committee to discuss interest rates.

The bank has been under attack by the ruling Social Democrats and junior coalition partner ALDE for refusing to lower borrowing costs despite growing budget and current account deficits. The board’s five-year term expires in October.

“You want interest rates to be lower, yes?” Isarescu said. “We do too. What needs to happen is inflation needs to fall, and...the budget deficit and current account deficit.” (Reporting by Luiza Ilie; Editing by Angus MacSwan)

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