The euro exchange rate yesterday climbed for the fourth trading session in a row, reaching 3.6594 RON, and thus marking an appreciation of 2.8% in one month, while the renouncement of the arrangement with the IMF continued to cause unrest.
Business world representatives have not been reluctant to rejoice in the failure of the talks with the IMF, that would give the Government more free reign, while NBR Governor Mugur Isarescu is advocating caution, although he feels comfortable with the foreign currency reserve of nearly 17bn euros.
"I represent an institution that has to see to stability. The termination of the agreement with the IMF allows institutions to be braver, to take more responsibility for the policies they apply. Let''s not behave rashly and issue tight or twisted regulations," the central bank head warned.
On the other hand, Dinu Patriciu, Rompetrol''s chairman says that the IMF''s recommendations for as low a budget deficit as possible are past their usefulness, and states that public spending should be increased in order to finance infrastructure development. "We need to accept the deficits, even the foreign deficits, because they are the source of growth," Patriciu said.
Against the backdrop of this debate, the stock market has rebound after a drop on Monday.
"The agreement with the IMF was a gain in visibility for Romania in the eyes of certain investors that knew that an institution still existed that was carefully monitoring Romania''s economic situation, yet I don''t think the termination of the agreement with the IMF will lead to a decline in the interest of foreign investors in the domestic capital market," noted Adrian Simionescu, Finans Securities manager.
However, the RON continued to weaken against the euro, having depreciated by 4.5% since the beginning of August.
Cristian Popa, NBR vice-governor says the central bank is ready to react in case this RON depreciation trend continues for too long. "This depreciation is a symptom and it is possible to respond with specific instruments. The meeting of the Board of Governors on November the 9th will discuss whether or not the NBR needs to change its stance in this regard," Popa stated yesterday. He added that this was also when the second quarterly inflation report was going to be discussed, which should update the central bank''s evaluation of the movement of prices.
Although the IMF mentioned the prospect of an inflation rate of 8.5% for the end of this year, Cristian Popa still maintains it is possible to keep within 8 - 8.3%, given the much lower inflation in October 2005 compared with October 2004.
Inflation should therefore be close to the upper limit of a 1% deviance with regard to the 7.5% inflation target announced by the NBR in August, after having aimed for 7% in the first half of the year.
Under the circumstances, the NBR cannot risk letting the recent RON depreciation trend stimulate price increases for imported goods, and especially for fuel, in the last part of the year, which is precisely when consumption spikes occur.
Former Finance Minister Mihai Tanasescu believes the depreciation, combined with the prospect of a strong growth in public spending at the end of the year, namely budget''s movement from surplus to a deficit of 1% GDP, jeopardises the NBR''s 8.3% inflation forecast.
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