National Bank of Romania (NBR) Governor Mugur Isarescu said rising prices for oil and planned salary increases of as much as 20 percent to government employees ahead of the general elections (scheduled for November 28) may cause Romania to miss on its 9 percent inflation target for this year. However, annual inflation would not exceed 10 percent, he was quoted as saying by Bloomberg.
The central bank official also said the NBR would again cut its intervention rate before the end of the year, in order to reduce interest rates as inflation slows. However, Isarescu would not say how many rate cuts the central bank will make in the next two months.
The National Bank last cut the intervention rate on August 30, to 18.75 percent from 19.25 percent, citing slowing inflation. The intervention rate is the rate that the central bank pays commercial banks for ROL deposits. The NBR has cut the rate four times since June 7.
With one of the highest annual inflation rates in Europe, Romania aims to cut it to 9 percent by the end of 2004, and further to 7 percent at the end of next year, from the 14.1 percent registered at the end of 2003. The annual inflation rate stood at 11.1 percent in September.
Mugur Isarescu also told Bloomberg that the central bank would no longer buy euros from the local market as often as it did since the beginning of this year, as it plans to allow for an appreciation of the national currency. Furthermore, he said the central bank would no longer announce its annual appreciation targets for the ROL, so as to prevent speculative investments.
The National Bank has bought a record 2.92 billion euros from the local market since February, mainly to keep the ROL from appreciating, which brought its foreign currency holdings to 9.5 billion euros, enough to cover five months of imports. The Governor grounded the decision on the fact that accumulating more foreign reserves through large monthly purchases of euros would become too expensive.
The central bank had bought euros on fears that a sudden appreciation of the ROL against the single European currency would exceed the existing level of Romania's labour productivity, diminishing the value of exports, thus further widening the current account deficit and adding pressure on inflation.
According to Mugur Isarescu, missing on the current account deficit target of 5.5 percent of GDP this year would be a "normal consequence" of increasing foreign direct investment.
In other news, Romania plans to allow foreigners to make deposits in its domestic currency as of next April, as part of efforts to make the ROL fully convertible before the planned accession to the European Union in 2007. The ROL will become 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, Isarescu said. "We have to do this if we want to be part of the EU club," NBR Governor Mugur Isarescu maintained. "I'm an advocate of Romania joining the EU in 2007."
razvan.voican@zf.ro
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