Bancherul - BANCI / ENGLISH / Isarescu: Strengthening monetary policy in 2005-2006 had negative effects

Strengthening the monetary policy in 2005 and 2006 had a negative effect on the subsequent evolution of prices, as it led to an unsustainable appreciation of the national currency and to the foreign currency loans boom, the governor of the National Bank of Romania (BNR), Mugur Isarescu, stated.

“The more we consolidated the monetary policy, as this second channel was expanding (foreign currency loans) and we had to make up for it, the more we drew speculative capitals and boosted the national currency. Does the simple theory of consolidating the monetary policy work? Have we got any good results out of it? No, the results are rather poor,” Isarescu explained, yesterday, at the beginning of a seminar on monetary policy, organized by BNR.

The central bank official argues that this mechanism created a soft spot by an excessive appreciation of the exchange rate and by puffing up the foreign currency loan “bubble”, a “trap” that more and more have fallen into.

The BNR governor’s presentation revolved around the idea that, although inflation is a monetary phenomenon, the quantitative theory finds its reflection in the actual economy only in the long run, whereas the relation of the two factors in the short and medium run is much more complex.

Isarescu also called attention to the people’s trust in the currency and saving and consumption tendencies, which largely account for the circulation speed and economic cycles.

Isarescu further stated, on the same occasion, that, when some point to the Economist Intelligence Unit (EIU) estimate, according to which the RON is overvalued, and its real value is 4.7/EUR, they should also quote, for good measure, the Barclays analysis, which proposes a rate of RON 4/EUR, “Romania Libera” reports. “I think they would draw a more accurate picture if both opinions were presented,” Isarescu argued.

The chairman of the Romanian Businessmen’s Association (AOAR), Florin Pogonaru, stated, on June 1, that, according to a study of the Economist Intelligence Unit (EIU), the reference exchange rate is overvalued and a more accurate level would be, at the moment, RON 4.7-4.8/EUR.