CAPE TOWN (MNI) - The National Bank of Romania continues to reserve the right to intervene on forex markets without warning, but wishes to do so as rarely as possible and is "more comfortable" with the leu's value now than a few months ago, NBR Governor Mugur Isărescu told Market News International on Saturday.
Isărescu, speaking ahead of the meeting of central bankers taking place here under the auspices of the Bank for International Settlements, said that the current spike in Romanian consumer prices would end by the spring and that inflation was more or less "under control".
Asked about the bank's current stance on forex intervention, he replied, "We try to intervene as little as possible, as infrequently as possible. But we are ready for any kind of intervention without announcing it clearly and without commenting".
The NBR might someday elect to comment on its forex interventions in the manner of New Zealand's central bank, Isărescu said. For now, he stressed that the bank retains the option to intervene as it sees fit: "We kept this total liberty".
However, he said, "I am more comfortable with the present level [of the leu] than with the totally unsustainable level over the summer".
He continued: "If the exchange rate will contribute, along with wise and appropriate policies, to containing the current account deficit, stimulating more exports, then it will be more related to the fundamentals".
The NBR continues to maintain a managed float for the currency despite "some debates" on the policy-setting Board, Isărescu said. For a small open economy like Romania, forex fluctuations could "create real problems" for both growth and inflation, he asserted.
By way of example, he noted that although the leu was now back to where it had started the year following multi-year highs versus the euro last summer, the inflationary impact of its depreciation has outweighed the deflationary contribution of its earlier appreciation because of the effect on public perception.
Inflation most recently -- October's 6.8% y/y CPI was two percentage points above what the central bank had anticipated only a month before -- has reflected the multiple impact of Romania's severe summer drought, higher commodity prices internationally, the general tapering off of imports' disinflationary effects and the depreciation of the leu in the wake of the global market turbulence, Isărescu said.
There is a "high probability" that CPI would persist above 5% through December, he said, although it will probably remain below 6% and thus in the middle of the range among new EU member states.
"The situation is under control, and we do expect that this increase will be over by the spring of next year and the curve of CPI developments will return to within the announced margins of the target", Isărescu asserted.
When asked if monetary policy had a tightening bias, Isărescu merely stressed the need for "strengthening other components of the economic policy mix" - although he did say the NBR will do what is necessary for price stability, and "monetary policy is of course dedicated to retracing the inflation" surge.
The question, perhaps, is why monetary authorities have become more vocal, he said. One reason is the need to counter the inertia of social and political developments by preparing the public for needed structural changes, while another has to do with rigidities besetting any attempt to negotiate an appropriate policy mix, he said.
"The best and optimum mix is to have strict income and fiscal policies with a restrictive monetary policy, but not very restrictive so as not to create again an unsustainable appreciation of the currency", he explained.
"But because of the emigration of the labor force, we consider that this optimum mix is unrealistic", as upward pressure on wages will stay high "for a while", he said.
However, "keeping inflation low means there are some requirements", Isărescu cautioned. "Single-digit inflation is totally impossible with double-digit wage increases".
Although Romania will avoid any direct impact from the sub-prime crisis in the U.S., indirect effects are already manifest, according to Isărescu. Besides the increased difficulty in financing a large current account deficit, confidence and sentiment with respect to Romanian fundamentals could suffer, he said.
"I do expect the indirect impact to be rather strong and this is why it is necessary for the National Bank to be prudent...and this is why the policy mix in Romania has to be wiser", he said.
Growth ahead could see a slowdown of 1-2 percentage points, Isărescu said, but such a cooling-off has the positive aspect of helping to avoid overheating.
That said, Isărescu predicted, "I do not expect that economic growth in Romania will be much slower, because all the ingredients are there including investments all across the economy".
The policy approach to euro adoption is unchanged, so that the common currency will hopefully be introduced in Romania sometime between 2012 and 2014, he said.