The 1% increase in the interest rate used by the central bank in its money market interventions (from 18.25% to 19.25%) and support for a slight ROL depreciation by foreign currency purchases are the two decisions made on Wednesday by the National Bank of Romania (NBR) Board. The decisions are part of the central bank’s strategy to mend the cracks that have surfaced at the macroeconomic level lately.
The foreign currency reserve now covers a smaller part of imports, which boomed beyond all expectations, savings are going down, lending is going up too fast and the economy has not been completely restructured.
“We must be very careful, because the economy is not completely restructured. We cannot allow these imbalances to grow in a pre-electoral year,” NBR Governor Mugur Isarescu said.
According to Isarescu, the central bank aims to help bring inflation down to 14% by yearend and to increase international reserves, which can only consolidate Romania’s international credibility and secure rating upgradings.
The foreign reserves covered 4.2 months of imports at the end of 2002, only to drop to 3.7 months at the end of May 2003, but things got even worse in June.
As prompted by the International Monetary Fund, the NBR will buy foreign currency to “fatten up” its reserves by the end of the year, also watching the evolution of imports, so as to have about 4 months of imports covered.
“We believe we will be able to maintain our position as a net currency buyer for a longer time interval,” Governor Mugur Isarescu said, outlining the central bank was by no means looking to hurt the market’s balance.
“We certainly would not want to hurt the inflation goal or to feed a ROL depreciation expectation that could entail inflationist pressures,” the Governor added.
The central bank relies on the fact that the ROL’s H1 evolution left it with plenty of room to manoeuvre so as to steer the domestic currency into a depreciation that should not hurt the inflation target. All the more so since the international circumstances also allow for interventions that would not result into significant exchange rate increases.
The ROL’s depreciation against the EUR/USD basket has barely reached 3.55% since the beginning of the year, although first-half inflation amounted to 5.7%. In nominal terms, the ROL/EUR exchange rate has increased 16.6% in the past year, whereas the ROL/USD exchange rate dropped 0.7%, with annual inflation standing at 14% at the end of June.
The central bank will buy more foreign currency, but will also try to get more cash from the money market, offering more attractive rates.
razvan.voican@zf.ro ; oana.nuta@zf.ro