Isarescu: Market should have anticipated NBR's exchange rate decision

The National Bank’s decision to allow for increased flexibility of the domestic currency’s exchange rate by substantially cutting the number of its interventions should have “definitely” been anticipated by the market, central bank Governor Mugur Isarescu feels.

“The statements made by the NBR Governor, but also other materials released by the central bank have, clearly enough, pointed to a less controlled exchange rate ever since this spring,” Isarescu told Mediafax in an interview.

According to the National Bank Governor, this issue had been repeatedly discussed in the NBR’s Board, with the present time being deemed as the most appropriate to enforce the decision.

The central bank’s vice-governor Eugen Dijmarescu, who is in charge with the NBR’s market operations, says that the bank will step in from time to time to influence the exchange rate, but only when the National Bank notices visible slippages from the exchange rate’s “balance level” – a level which is to be indicated by the market itself.

“A significant gap had emerged between the real and the nominal exchange rate, but the two started growing closer in the absence of anymore interventions. This is the premise needed to reach the inflation target,” Dijmarescu told a seminar organised by Alpha Bank, together with the National Bank and the Romanian Banking Association (ARB).

According to Dijmarescu, the NBR can accept a real, significant appreciation of the ROL, which will favour both the real and the nominal convergence towards the European Union.

In line with central bank estimates, the ROL may post an 8% growth rate in real terms against the euro this year, with the increase to continue at an annual pace of three percentage points, until the single European currency is adopted in Romania. Given this accelerated nominal convergence, the NBR estimates that the gross domestic product will reach almost 90 billion euros in 2010.

NBR Governor Mugur Isarescu last Thursday told a conference about Romania’s development strategy by 2005 that “inflationist recrudescence” cannot be ruled out. The National Bank felt that actions to push down inflationist pressures by using interest rate levers or minimal compulsory reserves actually entailed greater risks.

Moreover, he said that increased pressures for the ROL’s appreciation associated to the upcoming capital account liberalisation called for maintaining the declining trend of the interest rates, however without jeopardising the inflation target.

The flexibility of the exchange rate is essential to avoid the “impossible trinity”: independent monetary policy, fixed exchange rate and free movement of the capital, Isarescu said. “On of the three needs to be forsaken, to avoid trouble. We gave up on the quasi-fixed exchange rate, especially since the ROL is no longer just a commercial currency, but a financial one as well,” the NBR Governor stated.
razvan.voican@zf.ro