Inflation Rate to The Pharmacy

• The Risk of a Second Round

Bursa: International newspapers have started to publish frequent analyses indicating that central banks have not understood how serious the international financial environment is at this point. What is your opinion?

M. Isărescu: It is true that this opinion is circulating among newspapers and some analysts, but, as a participant in the governors" meetings, for instance within the BIS or the ECB, I can say that the dangers to international financial stability and the inflation risks are well understood. In fact, it was the central banks that first discussed the international financial turbulence. However, it is equally true that the public messages are intended not to trigger any panic, which would worsen the situation. Emphasis is laid on the need for concerted, suitable action to gradually overcome more difficult moments such as this one.

Bursa: What will be the inflation rate in 2008?

M. Isărescu: We are hoping (and there is a good chance) to bring the inflation rate to the forecast roadmap (below 5%) at the end of 2008 or the beginning of 2009. I would also like to add something on this topic. It is true that we missed the inflation target last year. But there is a long way between that and the opinion that we are facing a disaster in terms of both inflation and the current account deficit. The figures about the inflation rate in the new members of the European Union have been released recently. I have to say that Romania is no longer the last, as it was in 2005, but sixth out of nine. To target inflation is no pharmacy work. This is not to be understood in the stricter sense as "target practice." Targeting inflation is one of the three types of monetary strategy and is rather to be understood as a benchmark. We look at the trend, also on long term, and we follow the Maastricht criteria.

Bursa: How do you explain the inflation rate sideslip compared to the forecast, from 5.7% to 6.5%?

M. Isărescu: We did the inflation forecast in September, using also the prices of the products with a tendency to become more expensive: bread, flour, eggs etc. For edible oil, as an example, we thought that the price could not exceed the EU level; the problem was that the price of oil gained more than we had expected.

Bursa: What are the threats to achieving the inflation target this year?

M. Isărescu: For the first months of 2008, we have the certainty, inclusively due to the basis effect, that the annual inflation rate will remain relatively high. Consequently, the main threat is that if the inflation rate remains relatively high for a few months, it can trigger a spiral effect and lead to demands for higher salaries.

In fact, both economy theory and practice (we can refer to the latest message from ECB President Jean Claude Trichet) define this as the major risk of exogenous shockwaves such as those in 2007, namely the risk of a "second round" - a second round of price hikes and then the price - salary spiral. The inflation target can therefore be achieved, provided the understanding of the aforementioned risk. In this respect, the correct mix of economic policies (monetary, fiscal - budget, salary) is more important than each policy separately.

Bursa: 2007 was the first year when the National Bank"s intervention on financial - monetary markets did not visibly generate effects on the inflation rate, despite a significant loss of BNR.

M. Isărescu: As I said, the increase in the consumer price index above the inflation target in 2007 was obviously caused by exogenous shockwaves: the drought and the increase in the price of oil. The measures to strengthen the monetary policies in the second half of the year targeted the secondary effects of such shockwaves and it is premature to say whether they were efficient or not. As for the balance sheet loss, I beg to differ. In 2007, the National Bank had both an operating profit and a financial profit.

Bursa: There are estimates that 2008, too, will be a poor year for farming. At the same time, there are no investments... so agriculture will not help us too much in achieving the inflation target.

M. Isărescu: The probability of having two consecutive drought years is low. I hope that agriculture will be of help this year. As for investments in agriculture, I agree with you, but I believe that this topic should be approached separately, in a different interview.

Bursa: Does the National Bank have an inflation targeting plan that includes the prices of financial assets and property?

M. Isărescu: As far as property is concerned, we are still studying the matter.

Bursa: Does the National Bank have a method to attenuate the impact of the prices for raw materials, which have surged on global markets?

These are exogenous shockwaves and the monetary policy cannot counter them. The role of this policy is not to accommodate the shockwave and to discourage the second round.

Bursa: Considering that the measures stopped having visible effects, is it not necessary to perform a theoretical readjustment and a practical restructure of the central"s bank prerogatives?

M. Isărescu: No. I believe that, for the time being, the operational framework of the monetary policies of the central bank is well defined and we at the central bank no longer have to rediscover America. Moreover, let us not forget that we are part of the European system of central banks and therefore we comply with the type of monetary policies applied in the European Union.