Isarescu’s New Dilemma: How Much Can the Euro Slide Without Attracting Speculators Again

05.09.2011 ZF English

The Romanian central bank BNR is no longer thinking favorably about leu's strengthening further, after it gained some 4% since the start of the year. The rising leu is attracting portfolio investors, going into speculative bubbles, and foreign currency lending, BNR governor Mugur Isarescu said.

"Allowing the domestic currency to go up to dampen imported inflation can attract rising portfolio investments. More portfolio investments can lead to rising asset prices. Putting up with leu appreciation to help inflation may not be possible in terms of risks generated at the level of private sector balance sheets," Isarescu told the students of "Transilvania" University of Brasov at the end of last week.

BNR is facing a dilemma again, in the context where inflation seems to be climbing steadily, going beyond the 8% threshold this spring, almost double the level of a year ago.

After the VAT hike shock of last summer, pressures related to soaring fuel and foodstuff prices internationally have started being felt since autumn. In parallel, the economy is struggling to exit an over two-year recession, and loan demand, though weak, is foreign currency focused.