‘Greed Tax’ Won’t Stop Romanian Central Bank Acting on Inflation

(Bloomberg) -- Fallout from a surprise new levy on Romania’s financial sector won’t stop the central bank from acting if inflation gets out of hand, according to Daniel Daianu, a member of the bank’s interest-rate-setting panel.

The “greed tax” pushed through last year by the government to keep the budget deficit within European Union limits has clobbered stocks and prompted some banks to say they’ll rein in credit. What’s more, Daianu says linking how much lenders will pay to money-market rates constrains the central bank’s mission to keep price growth in check.

“Some people say it’s a tax on inflation,” Daianu said Wednesday on the sidelines of a Euromoney conference in Vienna. “But it’s not. It’s a tax on monetary policy, because the moment we feel the need to tighten further, it’s inescapable that we’re going to think about the impact on the financial sector.”

The central bank raised its benchmark rate three times last year, but kept it at 2.5 percent at this month’s meeting, citing the financial tax and associated measures aimed at generating 10 billion lei ($2.5 billion) of revenue that also apply to telecommunications and energy companies. The bank is seeking talks to hammer out a compromise over the fiscal package.

“It’s a constraint, but it’s not going to be an operational constraint de facto,” Daianu said. “Clearly it does have an impact on banks, net incomes. But it’s not like we’re going to refrain from tightening the policy rate because of this.”

No Done Deal

Tying the tax on lenders to money-market interest rates, which are a barometer of financial-sector liquidity rather than an indicator of inflated loan charges, is based on a “very weak argument,” according to central bank Governor Mugur Isarescu. President Klaus Iohannis said the fiscal uncertainty risks sowing economic chaos.

There’s no prospect of the central bank reducing lenders’ reserve requirements to reduce the burden on them, according to Daianu, who said there may be “some consolidation” in the banking industry. The levy amounts to 1.2 percent of assets a year at current interbank rates.

Discussions with the government could yet alter the picture.

The 2019 draft budget “is going to go through parliamentary debates, so there could be amendments,” he said. “Theoretically you can end up with a tax on assets and forget about the linkage" to money-market rates, he said.

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