November 9 (SeeNews) - Romania's central bank said on Thursday it has lifted its end-2017 inflation forecast to 2.7%, higher than it originally planned to do before the government announced controversial fiscal changes earlier this week.
The central bank, BNR, kept unchanged its 2018 inflation forecast of 3.2% made in August.
"We have calculated the inflation rate without all these fiscal changes: for the end of 2017, inflation would have stood at 2.3%, while for 2018, it would have been 3.1%. No doubt, without the tax impact, inflation rate would have looked better," BNR governor Mugur Isarescu said in a video conference.
In its previous inflation forecast made in August, BNR projected end-2017 inflation at 1.9%.
On Wednesday, the left-wing government coalition approved an emergency decree to change Romania's fiscal code. Starting January 2018, workers will pay the social security contributions currently paid by employers, while income tax will drop from 16% to 10%. Following the announcement, the Romanian leu weakened to a post-August 2012 low of 4.6279 per euro.
On Wednesday night, some 2,000 people gathered in front of government building in Buchares to protest against the fiscal changes which in their view will not increase their net salaries, as promised by the government, and will only complicate their fiscal position.
Last week, businesses and Romanian president Klaus Iohannis asked the governing coalition to abandon the planned tax changes which in their opinion will lead to fiscal chaos.
The upward revision of end-2917 inflation projection is largely attributed to increased production costs and wage increases, amidst uncertainty about energy prices, BNR said in its November inflation report.
Romania returned to inflation in January following 19 straight months of deflation that began in June 2015 after a 9% cut in VAT rate was expanded to include all food items, non-alcoholic beverages and food service activities. In addition, Romania cut its standard VAT rate from 24% to 20% at the start of 2016 and further to 19% starting January 2017.
Romania's annual consumer price inflation accelerated to 1.8% in September, from 1.2% in August, the latest data from national statistical office, INS, showed.
With regard to monetary policy, BNR said in the report that it has decided to continue the adjustment of its stance by narrowing the symmetrical corridor of interest rates on the standing facilities given the risks stemming mainly from Romania's fiscal and income policies and the uncertainties associated with economic growth in the euro area and worldwide.
On November 7, BNR maintained its monetary policy rate at record low 1.75%. BNR also decided tonarrow the corridor of interest rates on its standing facilities around the policy rate to ±1.00 percentage points from ±1.25 percentage points
BNR last changed its key rate in May 2015, when it cut it by 25 basis points.
(1 euro=4.6279 lei)