The government pushed earlier this year a very aggressive plan of tax cuts for next year, including a five-percentage point reduction of the value added tax rate from 24% to 19%, which was harshly criticized in recent weeks by central bank officials, including governor Mugur Isarescu.
The country’s president Klaus Iohannis vetoed the new fiscal stimulus plan, and the new Tax Code will undergo a second round of debates in Parliament later this month.
The proposed tax cuts forced the central bank to halt its monetary easing cycle started in August 2014, although the inflation turned negative for the first time in more than 25 years. Mostly due to a cut of the VAT rate for food products from 24% to 9%, the annual inflation came in at minus 1.6% in June, after a 3% drop in prices compared with the previous month.
The central bank sees the inflation rate staying around zero by the end of the year, but the governor said the bank will try to refrain from further from further rate cuts as the economy does not need more stimulus.
At Tuesday’s board meeting, the central bank also decided to keep steady its minimum reserve requirement ratios at 8% for leu deposits and at 14% for foreign currency deposits.