“The VAT increase will add between 2-3% to prices in our view, which basically means inflation between 6-7% at the end of the year”, said Nicolaie Chidesciuc in an ING report. He stresses that in 2011, inflation rate will depend heavily upon the exchange rate.

ING said that a tax hike is not the worst possible measure, but it will lead to a deepening of the recession and swell the GDP contraction to 1.4%.

The interesting part is the increase in VAT most likely will not be enough to compensate for the cut in pensions (demand will fall even more, evasion will probably rise). Moreover, Romania has a problem with current and prospective social insurance deficit and this issue may be solved only through freeze in pensions as soon as possible. The lack of measures to reform the pension system will make any attempt to lower the budget deficit completely unsustainable and put a damper on hopes of an economic recovery and of a sustainable growth in the future”, said the senior economist of ING.

ING expects the National Bank of Romania to leave key rate at 6.25% in the next rate-setting session, and to leave room for a further devaluation of the national currency to 4.35 lei/euro exchange rate.