Romania, which has one of the highest annual inflation rate in Europe, wants to reduce it to 9 percent by the end of this year, and further to 7 percent at the end of 2005.
Missing the 9% inflation target would come after the over achievement in 2003, when inflation was driven down by 3.7%, to 14.1%. The inflation cut down policy enforced by Bucharest authorities in keeping with commitments undertaken in agreements with international institutions was accidentally fractured this summer, by a 1.3% peak triggered by the overlapping of several utilities tariffs raises. In the ensuing period, the inflation rise could be slowed down by the ROL’s appreciation above expectations.
BNR nonetheless prepares to adopt a direct inflation target policy, starting mid-2005, which will mean a tremendous credibility test for all forecasts and inflation targets announced by the central bank. The central bank’s awareness of rising inflationist pressure was indicated by the institution’s discontinuing the strategy to reduce the intervention interest rate. At present the BNR intervention interest rate is 18.75%, yet the possibility of further cut down moves is being considered. According to the BNR Governor, the bank will continue to cut the intervention interest by the end of the year, “as inflation slows down.”
He wouldn’t say how many rate cuts the central bank will make in the next two months.
The BNR Governor says the central bank will decrease the frequency of currency purchases in the market, as compared to the beginning of the year, so as to allow for visible ROL appreciation. Along these lines, the Central Bank official supports the liberalisation of non-residents’ access to ROL bank deposits as of April 2005, as efforts will be made to render the ROL fully convertible prior to the EU entry scheduled in 2007.
„The ROL will be convertible on the international currency market later in 2005 or 2006, after Romania gives foreign investors full access to its domestic debt market and allows them to also make deposits at the central bank,” Governor Isarescu said.
The head of the central bank would offer no further details on the means to counteract the sudden withdrawal of the gains generated by short-term ROL deposits. What we know for sure is that deposit liberalisation is complicated by the short time allowed for driving interest rates down to a less tempting level as compared to those in foreign markets. Moreover, the drop is delayed by the recurrence of inflationist spells. Without a noticeable ROL depreciation risk, the gains brought by ROL deposits are certain and substantial, which could attract massive foreign currency entries.
„Romania would only adopt the euro as its currency by 2010 at the earliest, or as late as 2012” pointed out Isarescu. The Governor also said the central bank’s plan to redenominate the leu by knocking out four zeroes to ease cash operations and prepare for the euro would happen on July 1, 2005, as originally planned.
