Mugur Isarescu, in Parliament: Inflation will be back on decreasing trend

Newsroom 29/03/2018 | 14:25

National Bank Governor, Mugur Isarescu, was summoned to Parliament today to answer questions regarding the level of inflation. The Senate committee, led by liberal MP Florin Citu, wanted to know why the inflation rate is so high this year and how it is affecting the economy.

“Last year inflation, negative for the most part, was artificially created by fiscal measures, like decreasing some taxes at the beginning of the year (including VAT). The rise in prices in the last part of the year and the first months of this year was the result of several factors, including some that are outside of a market economy”, said Isarescu.

The level of inflation was covered by fiscal decisions and without that impact the inflation rate would have been negative. In the second half of last year inflation came back to positive through some fundamental factors, like rising income and high demand for goods. Also there came into place some new taxes, imposed by the government. And pressure on inflation came also from outside sources, like growing price for oil.

On behalf of currencies the trend was of RON depreciation caused mainly by high current account deficit, “which means that the money is leaving the economy so the value of RON is decreasing”. For comparison, Hungary, Poland or The Czech Republic, which had almost no current account deficit, were facing pressure for increasing the value of their own currencies.

The reaction of the BNR was fast, by allowing RON to depreciate and by raising the monetary policy interest. “We cannot have a stable currency at any level of the monetary policy interest”, says Isarescu.

But this year, inflation rate went up to 4.7 percent, according to February data, and the BNR interest rate is only half of that, at 2.25 percent. “It is normal to have this difference between inflation and official interest rate because we don’t want to have speculation capital entering in the banking system”, said the governor. The problem, as pointed out by the committee, is that commercial banks has yet to raise their own interest for deposits (still at 0.5 percent), but BNR official said that he hopes to see a change for that in the next months.

So far in 2018 the last year problems remain. Even if it is not the same situation as it was in 2007 – 2008, that lead the economy at hard-landing, we still face high structural deficit and high current account deficit, with pressure on RON and interest levels.

Regarding inflation, Mugur Isarescu show that after March data, when inflation rate will remain about the as in the last month, we will re-enter on soft decreasing trend and finish the year with an inflation of 3.5 percent in December.

„Joining the EU in 2007 meant that a huge amount of money entered in the economy, in terms of billions versus only hundreds of millions. All that money led to RON appreciation and also allowed commercial banks to give loans in foreign currency. If we add a structural deficit of 9 percent in 2008, we can understand know why we had such a hard landing afterwards. But it is not the case today and all we do at the Central Bank is to take the necessary steps to avoid that”, says the central bank head.

The governor made the comments during a meeting with the Economic Committee of the Senate to explain the implications of raising inflation on economy and the measures that the central bank will take through monetary policy to stop any bad influence.

Aurel Dragan

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