The business community should no longer bother trying to forecast the inflation trend this year. The National Bank of Romania (NBR) Governor Mugur Isarescu has publicly pledged that the 9% inflation target will be surely attained by the end of December, as the central bank is determined to make use of all its instruments to that particular end.
"I can assure the business community that we shall use all of our weapons to make sure that the inflation target is reached," The NBR Governor told the "Mugur Isarescu and guests" conference, organised last Friday at the FinFair financial fair.
Speaking in a grave tone of voice, the Governor said this "is the best thing the national bank of the Romanian State can do." But how is it planning to do it? "We shall control cash under any form. We will immediately purge any cash inflows: with one hand the foreign currency, and with the other the ROL," the NBR head said, hinting at determination to finally bring inflation down, after 14 years of failures.
The Governor continued to declare war on inflation on Saturday, telling dealers that the "significance of a single-digit inflation rate is so much more than a mere monetary target - it marks the eve of genuine stability."
The National Bank can both attract the cash surplus from the monetary market into deposits and set the exchange rate in order to push inflation down. In fact, April's overperformance when inflation stopped at 0.6% (despite pessimistic expectations) was mainly due to a stronger ROL on the forex market.
"The exchange rate can be used as a powerful tool to crush inflationist expectations," Mugur Isarescu said, explaining the process. At the same time, the NBR Governor feels that "we cannot afford to rely too much on the exchange rate, because of the foreign deficit, which is teetering on the edge." However, analysts feel that the central bank will not hesitate to sacrifice a potential deterioration of the foreign balance, as it is determined to see Romania become one of those countries with stable, functional economies, where the inflation rate is below ten percent. Still, the National Bank of Romania Governor has voiced concern about the very fast growth pace of imports, which point to aggregate demand that is about to spin out of control. Why? Because this kind of demand is just another facet of inflation, hiding behind the exchange rate stability and which can ruin the plans of the central bank, once it gets out of control.
Isarescu admits that inflation remains one of Romania's biggest unsolved problems. "It is getting hard to talk about patience. We are well aware of the risks entailed by this delayed disinflation process," the central bank governor stated.
He says that inflationist expectations can be fuelled even by keeping interest rates high. Still, the rate hike that followed last year's cut was intended as a measure to avoid the accumulation of inflationist pressures last fall.
razvan.voican@zf.ro
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