The national currency will take the brunt of inflation hike pressures, but the central bank will manage to keep exchange rates in check, said Nicolae Albu.

The effects of flooding over food prices, and subsidies granted indirectly to administered prices will maximize inflation risk. Food price growth and an inflationary shock generated by the exchange rates will determine bank to lift key rate by at least 50 basis points until 2011.

The monetary policy rate could thus increase from 6.25% to 6.75% at the end of this year.

“Monetary policy rate must be raised so as to meet current economic conditions”, Erste Asset Management director told The Money Channel.

However, the European Central Bank will have to keep an adequate level of liquidity in the market and will not raise the key rate above 1%, Albu added.

“But it is still the VAT hike that will lessen the inflationary pressures”, said Albu, explaining that on one hand, the hike will lead to a price growth, but at the same time, it will exert pressure over consumption.

It is very likely for the country to miss the IMF budget gap target of 6.8%, said Erste director, as the impact of VAT hike and of flooding has not been factored in.