There is a "high degree of uncertainty" regarding the future trend of the RON exchange rate, with the possible risk of "diluting" the correlation with the economic basic structure and of rising volatility and unpredictability, the NBR considers in its quarterly report on inflation.
Risks would be magnified by the rapid increase in the degree of financial integration of the economy, the high level of global liquidity and also by the still relatively high spread of domestic interest rates.
To these factors the NBR adds the risk of an exacerbation of the domestic demand amid rising capital inflows, in form of foreign loans contracted by banks and firms, with a possible negative impact on the internal and external balance of the economy.
The central bank notes that the domestic currency registered the highest real appreciation of the last five quarters, 3.1%, in the last three months of 2006.
NBR says the speculative capital inflows have increased a great deal since the second half of November, given anticipation induced by Romaniaes then upcoming EU accession.
NBR governor Mugur Isarescu says the large inflow of foreign capital was not recorded in September, when the capital account was completely deregulated, but in November, after the official announcement of EU integration. Under the circumstances, the NBR started monitoring the developments on the forex market more closely.
The central bank is afraid that the high RON growth pressures also involve the risk of a "sudden subsequent correction", which can ultimately endanger disinflation.
Growth the RON witnessed during the entire 2006 against 2005 doubled under the impact of foreign capital inflows registered in the last quarter of 2006 compared with growth posted in the first nine months of the year against the same period of 2005.
Additionally, the RON resumed the growth trend in nominal terms against the euro and also the dollar.
The future trend of the exchange rate is not certain, though.
"Considering the experience of the countries that joined the EU ahead of Romania, it is possible that the intensity and persistence of expectations related to the growth of the domestic currency against the euro should subside in the following period," considers the NBR.
What would this mean?
That there is rising probability on short term that the trend of the exchange rate should more accurately reflect the influence of economic bases and of the expectations triggered by their trend.
Leaving aside the risks considered, the NBR anticipates the real average growth rate of the RON will be higher than previously projected, particularly in the first part of the forecast interval.
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