The Romanian central bank (BNR) is likely to keep the key interest rate unchanged at 6.25 percent after its board meeting this Wednesday, according to analysts quoted by Mediafax newswire.

The Central bank has been slashing the rate in its previous board meetings, but it will not continue to do so due to the recently announced hike in the Value Added Tax (VAT) rate to 24 percent.

The key interest rate was of 8 percent at the beginning of the year, when BNR continued to cut the interest rate, after slashing 2.25 percentage points last year.

“If it was not for the VAT increase, I would have expected a 0.25 percent decrease of the key rate, which would have been the last one this year. The decision to increase the VAT changes things and under no circumstances the rate will be further cut, but rather kept afloat,” said Lucian Anghel, head economist for BCR. “In 12 months, the inflationary impact following the VAT increase will diminish. So I don't think the rate will be increased either,” said Anghel.

Rozalia Pal, head economist with Unicredit Bank, also thinks the inflation will start to fade down during 2011 and doesn't expect key rate cuts this year.

Romania could have reached the end of a monetary policy relaxation cycle, according to Nicolaie Chidesciuc, head economist for ING Bank Romania. “probably we have reached the end of a relaxation cycle. It remains to be seen whether a stagnation period will follow, and then a time of increase, or just a stagnation,” he said. Chidesciuc expects a lending comeback in 2012.

The Romanian Constitutioanl Court ruled the planned pension cuts as unconstitutional, which triggered the decision to increase the VAT by 5 percentage points, to 24 percent, one of the highest levels in the European Union.