The National Bank of Romania Governor Mugur Isarescu said yesterday that the central bank was considering a fluctuation range for the ROL exchange rate, though refused to defend fluctuation margins, showing that interest rates can offset fluctuations in the exchange rate.
"Untying the interest rate on the market from the monetary policy rate will allow us to play a margins game. If the ROL goes down then we could increase interest rates. We are not denying margins exist, but we're not defending them either," the NBR Governor explained.
The central bank on Sunday announced a monetary policy rate cut from 15.75% a year to 14.5%. Despite being one of the sharpest rate cuts, the maximum interest rate level is nearly five percent above what the bank pays for purging operations.
Asked whether interest rates would reach a negative level in real terms, the governor said that the level of reward on savings was not only dictated by inflation but also by the supply and demand of money. At the same time, he said this would stimulate those that have begun promoting interest rates for loans of 12%.
Isarescu's message shows that the NBR is ready for a possible increase in interest rates in the second half of the year, especially if the conditions for ROL depreciation are met.
The NBR official says that the fluctuations in February were actually "a test for an exchange rate level" by investors and banks, something which demonstrates that the setting or maintaining of margins is not a good idea.
Isarescu says that the margins "possibly validated by the market" are currently within plus or minus 6%, much lower than allowed by the mandatory monetary regime before the introduction of the euro. During the two years of the special regime, the exchange rate could fluctuate by 15%.
In the circumstances, Isarescu explained that the introduction of safeguarding measures, planned for after the next move of capital account deregulation, is "definitely" tied to the heavy fluctuations of the exchange rate.
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