Central Bank Governor: The VAT increase may trigger inflation shock

Increasing the VAT may trigger an „inflationist shock”, Romanian Central Bank (BNR) Governor Mugur Isarescu declared on Wednesday, following discussions of possible VAT increase in Romania. Isarescu said that an increase in tax, as a means of correcting economic unbalances, also entails inflationist costs, Romanian press agency NewsIn informs.

BNR Governor indicated that an external unbalances correction may be achieved through exchange rate, through credit and through tax increase. But all the proposed measure may pressure inflation.

„Correcting unbalances entails inflationist costs, if achieved through exchange rate. Another way would be through reducing credit, but it also sees inflationist costs”, Isarescu said. He noted that an increase in VAT could lead to an „inflationist shock”, while increasing other tax, like the income tax, „have more diffused effects, which will be seen, nevertheless, both in the economic growth and inflation”, Isarescu said.

Isarescu mentioned that tackling external unbalances cannot be achieved without tempering the economic growth. „The Romanian society does not want to understand this aspect”, BNR governor added.