How NBR spent one billion euros in September to keep exchange rate low

NBR spent approximately 1.1 billion euros in September to keep the RON/EUR exchange rate low for two weeks, yet the political crisis that started a week ago drove the rate back up towards 4.3 RON/EUR, from 4.2 RON/EUR.

"According to our estimates, the net inflows as a result of NBR's interventions on the forex market stood at approximately 1.1 billion euros. This is one of the biggest amounts ever spent to help the RON and confirms our point of view that the NBR has stepped up its interventions on the forex market towards the end of the month," ING Bank analysts say.

In mid September, the euro reached the last few months' high, 4.28 RON. President Traian Basescu yesterday specified that the target was to maintain the exchange rate within its set margin, that is over 4 RON/EUR, without getting close to 5 RON/EUR.

If political tensions continue, NBR will find it increasingly hard to keep protecting the RON. While the NBR intervenes to help the domestic currency, there may be abrupt rises in interest on the interbank market occasionally. Over the last few days, the shortage of cash on the monetary market has become acute, with banks starting to charge 14% a year when lending RON to each other, higher than NBR's key rate of 8% per annum.

ING anticipates the domestic currency will depreciate to 4.5 RON/EUR by yearend, given the increase in budget deficit; there is also the risk that it will overshoot this mark in the first quarter of next year.

A year ago, the NBR chose to protect the exchange rate at 3.6-3.7 RON/EUR, which created tension on the monetary market, with interests going as far as up as to 50% per annum back then.