Isărescu: No Need for Currency Depreciation Amid Tensions

The Governor of the National Bank of Romania, Mugur Isărescu, stated that there is no need to depreciate the euro-leu exchange rate because there are “a lot of tensions”. He added that he does not know what will happen to the exchange rate in the coming period, but he specified that, as the internal political tension diminishes and things begin to return to normal, then more flexibility will be given to the exchange rate.

The BNR governor also said that “any trade war between the United States and the European Union also has an impact on Romania”.

Mugur Isărescu was asked, on Monday, in a press conference, what his opinion is about the exchange rate, given that government sources claim that it could increase above 5 lei.

“There is no secret anymore, the budget was built on an exchange rate of over 5 (lei for one euro – ed.). It is possible to happen, right? The budget is built on the basis of data provided by a government forecasting authority. I would de-escalate the discussions related to exceeding the level of 5. I have read so many things that sometimes I was scared of the way this could be thought of. From 4.97 to 5 is less than 1%. Five bani means 1%, here it is only three bani. And they said it would be a disaster, for example, the price of telephony would increase, meaning instead of 100 lei, let’s give a figure, 100 lei the monthly subscription would be 101 lei. So the price would increase by one leu and this would have a big impact”, said Mugur Isărescu.

He explained that the BNR is an intermediary between the Ministry of Finance and the market. “That we intervened in the market? We intervened, but as I said before, we intervened, being in turn intermediaries between the Ministry of Finance and the market. The Ministry of Finance, instead of selling the available funds that they took from foreign loans, from European money, to sell them directly on the market, they keep them at the National Bank and when they need them, they ask the National Bank to sell part of these available funds, they are not small. Why are we intermediaries? Because despite the critical position of some of my colleagues who are also here today against the governor, I believe that selling directly in a market that is not very deep, the foreign exchange market in Romania has not reached a very deep level…. To sell a billion euros in a single day, well, the exchange rate moves, you have seen how it moves in the countries we compare ourselves to, the exchange rate moves by 20 bani. Then it goes and appreciates by 20 bani. Romania’s tendency is: when it appreciates it was an accident, when it depreciates, it’s a pity”, the BNR governor also explained.

He stated that there is no need to depreciate the exchange rate. “At the moment, there is really no need to depreciate the exchange rate, because we have a lot of tensions and we are doing it without unbalancing things too much. You see that the reserve increased by about 10 billion until the summer of the previous year, then it decreased by about 9 billion, it will increase again at the end of the month because 4 billion came in from external loans, so we are doing things the right way. (…) I don’t know what will happen to the exchange rate either, the market will determine, but slowly, slowly we will give more flexibility as the internal political tension diminishes, things start to return to normal and confidence is restored to allow more flexibility in the exchange rate, if a lot of capital comes in. You know that last year, until the summer, we tried not to appreciate the exchange rate because, when you have such a large trade deficit, it is not good to appreciate the exchange rate”, Isărescu also declared.

Any US-EU trade war also impacts on Romania

The Governor also stated that any trade war between the United States and the European Union also has an impact on Romania and explained that, if such a situation were to occur, there would not only be an inflationary impact in Europe, but a possible trade war would also create a recession.

The Governor of the National Bank of Romania was asked, on Monday, in a press conference, whether the economic measures taken by the US have an impact on Romania.

“Directly, no. I don’t know how much aluminum and how much steel we sell, probably a few hundred million. But indirectly, of course, any trade war between the United States and Europe, the European Union, also has an impact on Romania because we are in this alliance, in this European Union”.

He was also asked whether, in the context of a trade war that would bring a strong inflationary shock to Romania and Europe, this situation would close any window of opportunity for reducing the monetary policy interest rate, given that some analysts see a possible reduction in the summer.

“We see it too, but we are not discussing it now, because there are many uncertainties and we do not want to create expectations that, possibly, later, we cannot cover. In Europe, there will not only be an inflationary impact, a possible trade war I believe will create a recession. And then things really get complicated because, notice, we are already entering with the current certain data, because that is how we make the forecast, we are entering a period of demand deficit. So from the surplus, from the inflationary pressure we are entering a period of demand deficit, meaning a downward influence on price increases and a more degraded, negative impact on economic growth”, Mugur Isărescu also declared.

What would trigger economic growth?

He explained that last year Romania had a massive increase in consumption, but this did not go into economic growth, but into imports. “I told you, however, that the negative impact on economic growth depends on the quality of the factors that contribute to economic growth. Last year we had a massive increase in consumption and it did not go into economic growth, it went into imports. This year, even if consumption stagnates or grows very little, an increase in the absorption of European money and investments based on European funds can lead to economic growth. So these would be some coordinates that I see clearly. The rest I do not see clearly and I do not think you see them either, which is the impact of a trade war. Anyway, it is not good”, the NBR governor also specified.

The inflation rate followed a downward trend for most of 2024, but this trend moderated in the third quarter and then was even in a process of temporary reversal in the fourth quarter. “Fuels and processed foods caused inflation to return at the end of the year. As for the price of fuels, it increased as a result of the increase in oil prices and the appreciation of the United States dollar. So far, the changes have been benign and have not spread to other parts. But let’s see how the negotiations evolve, especially the discussions between the United States and Russia,” Isărescu said.

US President Donald Trump last week ordered the imposition of a 25% tax on steel and aluminum imports entering the US, as part of a major expansion of existing trade barriers, the BBC reports. European Commission President Ursula von der Leyen said on Tuesday that she “deeply regrets” the United States’ decision to impose “unjustified” tariffs on European steel and aluminum exports and promised that the EU would act to protect its economic interests.

Read the central bank’s latest report on inflation here.