May 4, 2018 / 12:41 PM / a year ago

Romanian ruling party chief slams central bank for hiking rates

BUCHAREST, May 4 (Reuters) - The head of Romania’s ruling Social Democrat Party has criticised the central bank for hiking its benchmark interest rate twice this year and for suggesting fiscal policies were driving an inflation surge, a letter released on Friday showed.

It is not the first time Social Democrat (PSD) chief and lower house speaker Liviu Dragnea has criticised the central bank, which is independent from the cabinet but whose board members are appointed by parliament.

Dragnea is seen as effectively in charge of the cabinet.

Higher energy and fuel prices as well as consumption-friendly wage hikes in the import-reliant European Union state drove inflation to a five-year high of 5 percent in March, significantly above the central bank’s 1.5-3.5 percent target.

The bank’s board unanimously hiked its benchmark interest rate twice by an overall 50 basis points to 2.25 percent but chose to stay on hold at its April meeting, saying the first two increases had yet to fully take effect.

The bank holds a meeting on May 7 and analysts have said they expect it to deliver another quarter-point hike.

“Successive interest rate increases at the start of the year, when the private sector is deciding on its business and investments for 2018 are of a nature to gravely affect its trust in the Romanian economic environment,” Dragnea told the central bank in a letter he sent in late February released on Friday.

“Board members are inducing a state of mistrust in the government in the business sector, and a monetary policy decision, namely raising the interest rate, based on suspicions regarding government activity is not correct monetary policy.”

While the bank has said the surge in inflation was largely driven by higher energy and fuel prices, it also said that a government decision to shift the burden of social security taxes entirely onto employees raised uncertainty, as did the risk of overshooting budget deficit targets.

The government has gone backwards and forwards on its tax and wage plans, which, coupled with a surging current account deficit has weighed on assets, including the leu currency.

The cabinet posted a budget deficit of 0.5 percent of GDP for the first quarter, compared with a surplus of 0.2 percent in the same period of last year.

“A potential lack of reaction from the central bank, both in the first two months of the year and in perspective would have amplified the risk of anchoring inflationary expectations at a new increased level,” the bank replied in a letter.

“An important aspect we must underline is the chain reaction between excess demand, budget and current account deficit, a weakening exchange rate and inflation.”

On Thursday, after meeting central bank Governor Mugur Isarescu and deputy governor Florin Georgescu, Dragnea said the bank had his support, denying a conflict.

“While the letter ... could be viewed as an attempt to limit the decisional independence of the central bank, the reply from the central bank and the post-meeting statement from the PSD leader suggest that central bank independence is not under imminent threat,” ING said in a statement. (Reporting by Luiza Ilie, editing by Louise Heavens)

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