Isarescu: The euro will stay high this year

The Romanian currency will not be able to regain the ground it lost against the euro this year, so the average exchange rate will register an increase against 2007, considers Mugur Isarescu, NBR governor.
“This year’s average will be inferior, from the point of view of the RON, to last year’s,” said Isarescu during a workshop organised by the Association of Financial Analysts (CFA), considering this is a common sense assumption. Obviously, Isarescu did not give any hint on the level the average exchange rate may climb to in 2008.
Most analysts expect the rate to advance by 5%-6% this year compared with 2007, to around 3.5 RON for an euro. According to pessimistic projections, though, the euro may go as high as 4 RON in spring, with the rate set to go down in the second half of the year.
Isarescu dismisses the idea of a financial crisis and points out that RON’s recent trends are comparable to the ones registered by the Polish zloty or Hungarian forint in the first year after EU integration. Since last July to this January, the RON has lost 21% against the euro, after having gained around 10% in the first half of 2007. The governor emphasised we were just witnessing a break in a nominal RON increase that had lasted for three years, but that in real terms (if the impact of inflation is taken into account), the domestic currency was strengthening further.
Still, RON strengthening has been in recent years the main factor the NBR has benefited from in its fight against inflation, considering the interest rate, the main instrument that should be theoretically used in the inflation targeting regime, still has a weak functionality. The extent of RON growth contribution in the NBR’s fight against inflation was seen starting the second half of last year.
Thus, the NBR now finds itself in the position where it has to admit it will miss the inflation target this year, too, for the third time in four years, projecting a 5.9% rate.
Isarescu states, however, that the break in RON’s nominal increase has a fundamental cause in the too rapid advance of salaries in the economy, with their dynamics exceeding productivity gains by far.
“There’s no more room for nominal growth with such salary increases,” said the governor, pointing out 2008 is the third year when two-digit salary raises are scheduled against a single-digit inflation rate”.
Inflation reached 0.86% in January 2008, compared with 0.2% in January 2007, according to the National Statistics Office (INS) data. A year ago, the annualised inflation rate stood at only 4%, but the price hikes of the second half of 2007, caused by RON decline, last year’s drought and the international market conditions drove inflation back to 2006 levels.