April 20, 2018 / 9:30 AM / a year ago

High Romania inflation not a result of fiscal policy - ruling party chief

BUCHAREST, April 20 (Reuters) - The leader of Romania’s ruling Social Democrats lashed out against criticism that a surge in inflation was driven by his party’s fiscal and income policies, and accused the central bank of exaggerating the impact of higher trade deficits.

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 has raised its benchmark interest rate twice this year, with analysts expecting further hikes.

The government has gone backwards and forwards on its tax and wage plans since it took power more than a year ago, which has weighed on Romanian assets, including the leu currency.

“In no way do I agree that inflation stems from policies to raise Romanians’ income,” Dragnea told private television station Antena3 late on Thursday.

He said inflation rose because of higher energy prices after EU-required market deregulation, higher prices for crude and food, as well as what he called a decision by “foreign-owned companies to hike prices after seeing Romanians’ income rise.”

Previous tax cuts and public sector wage rises have fuelled consumption which has led to surging trade and current account deficits.

While the shortfalls are nowhere near levels seen before the economic crisis, their upward trajectory has analysts, the European Commission, International Monetary Fund and the central bank worried that Romania could be vulnerable to a new crisis.

“I think the Romanian central bank is Romania’s, not ... somebody’s property, it must work to Romanians’ benefit,” said Dragnea, who keeps a tight grip on his party and is seen as effectively in charge of the government.

“I am convinced that it should work together with the government to lower inflation and find the best monetary policy solutions instead of us always listening to central bank employees making public estimates that bring disservice to Romania.”

It is not the first time leading Social Democrats have verbally attacked the central bank, which is independent from the cabinet.

Former prime minister Mihai Tudose criticised it for failing to curb a rise in interbank interest rates and for not intervening to stop the leu currency from weakening.

The bank has said it expected inflation to exceed its target range in the first part of 2018, as the statistical base effect of a 2017 value-added tax cut fades, before falling back to within target by year-end. (Reporting by Luiza Ilie Editing by Peter Graff)

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