Governor Isarescu is facing prices dropping for the first time since communism, international analysis shows

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After 25 years of battling inflation, Mugur Isarescu, the governor of National Bank of Romania (BNR), Europe’s longest-serving central bank chief, now faces prices dropping for the first time since communism “during the biggest-ever surge in local-currency lending – two forces that call for opposite policy responses,” according to an Bloomberg analysis.

The quoted source notes that President Klaus Iohannis weighs whether to sign a controversial bill that would allow citizens to walk away from their mortgages.

“How Europe’s longest-serving current central bank chief tackles that conundrum will help steer one of the continent’s fastest-growing economies as it pursues euro membership,” shows.

Deflating prices concurrent with soaring mortgage debt aren’t unique to Romania. Sweden and Switzerland are grappling with that same combination. The analysis remarks that Isarescu still has room to trim borrowing costs, even with the benchmark interest rate at a record-low 1.75 percent. That gives him a choice: cut and risk a credit bubble like the one that burst in 2008 and forced the nation into an international bailout, or raise and chance denting demand and crimping economic growth.

“Isarescu is backed into a corner because he wants to avoid imbalances as Romania looks toward joining the euro area,” Roxana Hulea, a London-based economist at Societe Generale SA, said.

What will Isarescu do? “He could relax banks’ reserve requirements as he waits for deflation to reverse. Rather than tackling credit expansion by raising the benchmark from the current 1.75 percent, Isarescu has mooted macroprudential tools that could resemble the stricter limits on mortgage borrowing deployed by central banks such as the Bank of England to cool property prices,” the analysis said. With all the conflicting factors facing the governor, whose term doesn’t end until 2019, the best approach may be to stand pat, it also shows.

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