Romania’s central bank held its benchmark interest rate (ROINTR=ECI) at 6.50% as expected on Friday, saying annual inflation will “surge markedly” in the third quarter due to increases in VAT, excise duties and electricity prices.
Romania’s near two-month-old broad coalition government has hiked a series of taxes to rein in the widest budget deficit in the European Union and ensure the country keeps its investment grade credit rating.
But members of the government are split over further measures to cut state spending, and the ruling majority of centre-right and centre-left parties is fragile.
The central bank has said the tax hikes were necessary to stop the country falling from the last rung of investment grade, but would weigh on consumption and economic growth – putting downward pressure on inflation over the longer term.
However, it said annual inflation “will surge markedly in the third quarter under the transitory impact” of the higher taxes, as well as the end of a government cap on electricity prices.
The bank, which targets inflation at 1.5%-3.5%, will present new forecasts for this year and next on August 12.
Analysts polled by Reuters earlier this month expect inflation to rise to 7.6% by year-end, before falling to 4.0% by end-2026, still above the bank’s target.
S&P Global said last month it expected inflation to peak at over 9% after the tax hikes.
Analysts expect the bank to keep interest rates on hold throughout the rest of the year, if not longer.
“With inflation set to remain firmly above the central bank’s target range for the next 12 months, we don’t expect any rate cuts until at least mid-2026,” Capital Economics’ emerging Europe economist Nicholas Farr said in a statement.