NBR is not eliminating the possibility that the leu could gain momentum, Isarescu says

National Bank of Romania is not eliminating the possibility of the local currency to gain momentum, BNR governor, Mugur Isarescu said on Monday at a media briefing.

“This year is not made up of only two months, there are recoveries of the currency exchange rates and this possibility is still standing”, Isarescu said.

He added that the leu-depreciation forecasts made by BNR contributed to the steep decline of the local currency.

“There is also a boomerang effect. I am surely not very pleased about it, but we have made enough forecasts on the leu’s depreciation. I am not in favor of optimistic predictions, but nor I am for the opposite extreme”, Isarescu stressed.

The local currency dropped massively since the beginning of the year, on a generally bearish regional trend, hitting record lows against euro, of over 4.3 lei versus the single European currency. On January 22, the leu slumped to all-time low (4.3127units/euro) at the benchmark exchange rate established by National Bank of Romania.

The depreciation of Romania's leu in the context of a relaxed fiscal policy fails to contribute to the adjustment of the current account deficit but actually stimulates inflation, worsens recession and leads to major unbalances, said central lender (BNR) governor, Mugur Isarescu, cited by NewsIn.

Yet, BNR remains optimistic about attaining its inflation target of 3.5 percent plus or minus one percentage points in 2009, Isarescu said. The annual rate of inflation hiked to 6.71 percent in January, beating analysts' projections and up from the 6.3 percent level at yearend.

The central bank repeatedly stressed the importance of a balanced mix between the monetary policy and the revenue and fiscal policy. Isarescu said the monetary policy would be relaxed only when the fiscal one is in place.

Romania's benchmark rate was pinned at an annual 10 percent in the most recent monetary policy session at the beginning of February, when it was lowered by 0.25 percentage points.

BNR made no indirect intervention on the exchange market from the middle of 2006 until 2007, underscored Isarescu, adding the central bank has the right to step in unannounced to avoid the destabilizing moves of the exchange rate.

Also, the central lender's head has recently admitted BNR sold foreign currency in the past months to support the leu, a measure correctly hinted by the market.

He added that BNR was ready to act in response to swaying shifts of the currency exchange rates.

It is necessary a manageable adjustment of the leu as well as of other emerging currencies in the region.

“It is crucial a certain lineup of currencies in the region, but the drastic decline of the local currencies can create shifts that could cut the economic balance and must be avoided”, Isarescu stressed.

BNR governor justified the “necessary correction” of the currencies with a flexible trend in the region by the existence of foreign imbalances in case of Romania, Hungary, Czech or Poland.

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