Croitoru, BNR: Capital Inflows To Turn Focus On Monetary Policy Rate

05.13.2011 By Florentina Dragu

Higher foreign capital inflows in Romania will likely bring back focus on the key interest rate, but the central bank might have to divert attention to competitiveness from inflation targeting, a central bank official said Friday.

"The consistence of macro-prudential measures will strengthen stability and improve investor confidence in long-term stability, which will attract further capital inflows. However, this will increase upside pressure (on the national currency) … and I think the central bank would want to intervene to stimulate economic growth, which equals to a change of focus from inflation to competitiveness," said Lucian Croitoru, adviser to central bank's governor Mugur Isarescu.

In May, the central bank left its main interest rate at a record low of 6.25% a year for the eighth straight time, after costlier fuels and food items pushed the inflation rate to the highest level in 31 months.

The bank also revised upward its estimate on the year-end inflation to 5.1% from 3.6%.

Speaking at a banking seminar, Croitoru said all emerging states face imported inflationary pressure and the appreciation of national currencies provides only a temporary support to reign in consumer prices.

"Massive sterilizations in the markets turn into quasi-fiscal losses for central banks, namely into public deficits which end up reflecting into inflation," Croitoru said.

He added that the central bank's interventions in the market to buy foreign currency, followed by sterilization operations, have been unproductive on the long-term, because they drive interest rates higher.