January 7, 2019 / 12:37 AM / 3 months ago

Romanian bank tax could constrain monetary policy -central banker

BUCHAREST, Jan 7 (Reuters) - Romania’s central bank will see its control over monetary policy constrained after the Social Democrat government introduced a tax on banking assets in late December, a bank board member said on Sunday.

The European Union state’s government approved a slew of surprise taxes via emergency decree including a new levy on banks’ financial assets despite plummeting stocks and criticism from employers and unions.

Banks would need to pay the progressive tax if money market rates exceed 2 percent. The government, which did not explain how it had settled on a reference point of 2 percent, said the tax aimed to ensure loan costs fell for households.

But tying a bank tax to interbank rates would constrain the hand of the central bank, whose main task is to keep inflation down while preserving financial stability.

“The central bank must control monetary conditions so that inflation does not go out of control, while also keeping in mind financial stability requirements,” central bank board member Daniel Daianu said in a commentary on the bank’s blog.

“It must be noted that if inflation would rise and the central bank would tighten monetary conditions, the increase of the tax on assets would influence the condition of some banks, with an impact on financial stability.”

The central bank raised its benchmark interest rate three times last year to the current 2.50 percent, tightening policy to curb inflation, which stood at 3.4 percent in November.

The 3-and 6-month money market rates were quoted at 2.64/2.97 percent and 2.90/3.28 percent respectively.

Fiscal uncertainty and widening budget and current account deficits could also trigger capital outflows, which would lead to a depreciation of the leu currency, adding pressure for households with hard-currency loans.

The central bank could raise rates to counter currency depreciation and a rise of non-performing loans, but that would also shift interbank rates higher, and the asset tax with them.

“The reference rate can put higher pressure on some banks given that profits are not equal,” Daianu said. “Things would be further complicated if economic activity would slow down and external shocks would happen. Financial intermediation will also suffer.”

The central bank holds its first rate-setting meeting of the year on Tuesday. Analysts expect it to keep its benchmark interest rate on hold. (Reporting by Luiza Ilie; Editing by Peter Cooney)

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