The central bank said the inflation rate will stay negative over the next three quarters, but it will return to positive territory by the start of 2017. However, the bank chose to keep its main monetary policy rate unchanged at 1.75% a year in today’s meeting, as it awaits the final fiscal stimulus package.
The Romanian lawmakers adopted a new Tax Code that includes several tax cuts as of next year, most notably the reduction of the value added tax rate to 19%, from 24% currently. President Klaus Iohannis vetoed the law, and the Parliament will hold a second round of debate later this month.
“The main part of this disinflation doesn’t come from the possible reduction of the VAT rate to 19% – which we included though is no certain yet, but from the lowered VAT for food products, as the food products’ weight in the consumer basket is very big in Romania,” Isarescu said.
In June, Romania cut the VAT for food products to 9% from 24%, and the annual inflation rate slid to minus 1.6% from a positive 1.2% in May.
The governor said the tax cut transmission was larger than the central bank predicted, therefore the price reductions were bigger than initially thought.
Another argument against deflation is the 6% rise of domestic consumption, which could accelerate to 10% by the end of the year, Isarescu added.
“The danger is not the actual decline of prices, who doesn’t want prices to fall?! The danger of deflation is the gradual but exacerbated decline of consumption, which lowers demand and slows economic growth,” said Isarescu.
“We’re not there yet. We have increased consumption, we have economic growth.”
Moreover, the announced increases of public salaries will induce inflationary pressures, the governor said.
“7-8-10% on average is a significant wage increase for an economy. It is hard to believe, the productivity of Romanian economy will grow by 10%, so this gap will transmit somewhere, perhaps in some price increases,” Isarescu said, noting that, however, those price hikes might be hidden by the fall in food prices in the overall consumer price index.