English
Ana Săbiescu
Mugur Isărescu, the governor of the Romanian National Bank, yesterday warned that stagflation correlated with a high foreign deficit could be one of the worst combinations for Romania. If inflation remains high and the economy shrinks, then the danger of stagflation will put significant pressure on the economy.
Romania"s current account deficit last year dropped to 12.3% of the GDP (down from 13.5% of the GDP in 2007) and it is estimated to drop to 7.5% in 2009.
"The exchange rate played its part, to the extent possible, in adjusting the foreign deficit, and will continue to do so in the future", M. Isărescu said, who added that adjusting the foreign deficit exclusively by depreciating the leu is dangerous and could create inflationary pressure, if it is not correlated with economic policies.
The governor of the Central Bank is however optimistic and says that Romania"s economy "has begun adjusting its path and is going in the right direction".
Inflation forecasts revised downward to 4.4% for 2009 and 2.8% in 2010
The inflation target that the NBR set for 2010 is 3.5%, with a 1% error margin, thus confirming the scenario that the National Bank has been working with since February 2009, Mugur Isărescu explained. The inflation target for 2009 is also 3.5%.
Also, the Central Bank revised its 2009 inflation forecast to 4.4% (down from 4.5%) and the inflation forecast for 2010 to 2.8% (down from 3.2%).
The Central Bank Governor said: "The mild reduction of the depreciation risk for the leu, and shrinking demand have caused us to revise the inflation forecasts downwards to 4.4%, from 4.5%"
The National Bank feels there is a higher likelihood for quick deflation than before, because the main factor that pressured inflation - the evolution of the exchange rate - seems to have eased up.
"Both Romania"s economy, as well as inflation, paid the price of the unavoidable adjustment of the foreign deficit", Mr. Isărescu said.
One of the factors that support the deflation process is the evolution of foodstuff prices, as 2008 had a good harvest and nominal prices of imported goods dropped.
Still, Mr. Isărescu said: "The uncertainty remains great, even though not as much as it used to be, and there is mostly the chance of missing the lower bracket of the forecast", Isărescu said.
• The monetary policy of the NBR was and will remain cautious
The cut of the key interest rate from 10% to 9.5% was not aggressive, and the decision to do so was based on the downward trend of inflation and the lowered depreciation risk for the leu, Mugur Isărescu explained. He said: "We were surprised by everyone"s surprise. The monetary policy of the NBR was and will continue to be cautious".
The arguments in favor of this cut are: the downward trend of inflation, the contraction of aggregate demand, the reduced depreciation potential for the leu, and the continuing rapid adjustment of the current account deficit.
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