The ROL exchange rate will be somewhat livelier in 2005, as if reminding the market of a foreign exchange risk it has been increasingly ignoring lately. This does not mean a halt in the domestic currency's trend to appreciate in real terms.
"We will allow for a greater volatility of the exchange rate to address the risks related to the capital account deregulation," Mugur Isarescu, NBR Governor on Thursday said during the "Convergence in the EU" conference.
At the same time, the head of the central bank says the annual exchange rate fluctuation will be "much lower" than before, due to the inflation decline to 6-7%. Which means the ROL depreciation will be much lower than this low inflation level. Annual ROL/EUR exchange rate fluctuation had reached 9.9% at the end of August 2004.
So how would this combination between a higher volatility of the exchange rate and the continuation of the ROL's appreciation in real terms look like? It would look like some episodes of domestic currency appreciation even in nominal terms, with rates back towards 39,000 ROL/EUR for instance, followed by exchange rate increases so as to lead to a certain depreciation in nominal terms when drawing the line and calculating the average.
The certain thing is that eight months and a half through this year, the real appreciation of the ROL against the EUR/USD currency basket has already exceeded 4%, that is more than the upper limit of the 2-4% interval deemed by the NBR as indicative of the exchange rate trend.
"I don't see why we shouldn't keep it until the end of the year," Isarescu says. He believes the labour productivity improvement is "remarkable," which leaves room enough for the appreciation of the ROL in real terms to continue, besides the real increase in wages.
The Governor does not see any good reason why the appreciation of the ROL in real terms (depreciation below the inflationary rate) would be such a big inconvenience for exporters in terms of competitiveness.
On the other hand, he warns that Romania still has trouble keeping its foreign deficit in check. "We have no guarantees that the 2004 current account deficit will be below 6% of GDP, though it cannot be too far above that," Mugur Isarescu stated.
The head of the central bank fears a scenario wherein the foreign deficit moves up to becoming impossible to sustain. If that were the case, given the already tight budget deficit, which does not allow using the fiscal leverage to adjust the foreign deficit, NBR might find itself faced with a current of opinion leaning towards the ROL depreciation as a solution to this problem.
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