National Bank cuts ROL appreciation forecasts down to 2%

Will we see a faster depreciation of the domestic currency against the 60% EUR/40% USD basket? Will inflation stop below 13-14%, the level forecast at the beginning of the year? Hard to say. It is however certain that the National Bank has a new target for the ROL’s appreciation in real terms for this year: after an initial estimate of 3-4%, the central bank now hopes for 2%.

“We have slightly adjusted our targets, based on the evolution of several indicators. We start from the assumption that inflation will revolve around 13-14% and that both the euro and the dollar will keep their 60%, respectively 40% shares in the basket considered by the central bank. Under these circumstances, we are predicting a 2% or even smaller appreciation of the ROL in real terms. This slight change in figures was prompted by the real increase in salaries, which was a little bigger than we had expected,” Cristian Popa, vice-governor of the National Bank of Romania, told Ziarul Financiar.

At the beginning of the year, central bank officials had announced their forecasts: 13-14% inflation and a 3-4% ROL appreciation in real terms, related to the currency basket. In other words, the domestic currency was supposed to become some 10% more expensive.

It must be said that no one knew the future evolution of the EUR/USD exchange rate on the international markets or its effects on the Bucharest market. According to Popa, the weight of the two foreign currencies (euro and dollar) into the basket considered by the central bank is little likely to change, as “there are no signs pointing to alterations in Romania’s commercial ties.”

The new real appreciation target could be achieved either by a larger than initially anticipated depreciation of the domestic currency or by an inflation drop. Considering the same ROL depreciation pace, a drop in inflation down to some 12% would normally lead to a smaller real appreciation, around 2%.

How can this adjustment be explained and what effects will it trigger?

“The central bank may believe that inflation will go lower, even below the current 13-14% target. Let’s not forget that last year they also had a certain inflation target which they kept until fall, and then inflation figures were revised, when things had already been outlined. On the other hand, they (the central bank, i.e.) may be expecting larger capital outflows in the second half of the year, ergo a larger depreciation of the domestic currency,” says Cristian Sporis, treasurer at Raiffeisen Bank.

Another explanation could come from the commercial deficit, which has taken a strongly ascending trend. Imports had outpaced exports by 2 billion dollars after the first five months of the year. oana.nuta@zf.ro