Romanian currency appreciates following rise in key rate

The RON gained one unit in the first two hours of the currency exchange session on Wednesday, up to RON 3.33/€1, owing to speculative movements anticipating an increase in the key rate during yesterday’s meeting of BNR’s Board of Directors, according to currency dealers. After the session opened, at RON 3.3420-3.3440/€1, the national currency rose to RON 3.3300 - 3.3350/€1, around 10.50 a.m.

Major exchange rate fluctuations were not likely prior to BNR’s decision, but a significant increase in the key interest rate is likely to lead to appreciation of the national currency to less than RON 3.3300/€1, according to forecasts by analysts earlier this week.

However, some analysts considered the possibility that the central bank might keep the key rate steady, because Romania is still facing problems, especially in terms of the current account deficit. The rise in the monetary policy rate could attract speculative capital, leading to a strong appreciation of the national currency and, eventually to a wider current account deficit. BNR Governor, Mugur Isarescu, recently drew attention to these risks. Furthermore, a raise in the key interest rate would mean a shift in BNR’s strategy, as it successively lowered the rate earlier this year, in four sessions, to the current 7 percent from 8.75 percent at the beginning of 2007.

“We feel BNR should raise the key rate by at least 0.5 percent in its October 31 meeting. This should not lead to massive appreciation of the exchange rate,” according to the head of Raiffeisen Bank’s Macroeconomic Research Department, Ionut Dumitru, on Monday.

ABN Amro’s Chief Analyst, Radu Craciun, also expected a 0.25-0.5 percent raise. However, the impact of this decision will be felt only in 2008, and is unlikely to help the central bank’s efforts to keep inflation within the established parameters, he added.

Analysts predicted significant inflationist pressures for 2008. This year’s severe drought is driving up prices, which will spur inflation. Experts are therefore indicating that the only way to keep inflation under control would be an increase in the key interest rate.

BNR had made no announcement on a change in the key interest rate prior to the closing of this page.

Appreciation 
Major exchange rate fluctuations were not likely prior to BNR’s decision, but a significant increase in the key interest rate is likely to lead to appreciation of the national currency to less than RON 3.3300/€1, according to forecasts by analysts earlier this week.