This May, there was strong pressure on the foreign exchange market, with some of the largest capital outflows taking place and the National Bank of Romania (BNR) intervened with very large amounts, but keeping the EUR to RON exchange rate under 5 was impossible, explained BNR governor Mugur Isarescu at a press conference on Tuesday.

„In May, we had strong pressure on the foreign exchange market, with – I would say – all-time high capital outflows. They were not caused by just one element, there was an avalanche of negative factors. It all started due to tensions and the often aggressive campaigning rhetoric, it gradually deteriorated, then came the result of the first round of elections, followed by the government’s resignation – and the alarm signal was the fact that immediately after the first round the Finance Ministry could not absorb the liquidity from the market and announced this. Consequently, we witnessed massive outflows. The major problem was not the interventions. I say it now clearly: the National Bank intervened on the day after the election with very large amounts – some of them made indirectly, through intermediation, that’s how any central bank proceeds in certain situations, and this was a situation we had planned ahead, as we expected various capital movements,” Isarescu declared at the presentation of BNR’s Quarterly Report on Inflation.

He explained that liquidity withdrawals from the market are important if interventions are large.

„And now as a conclusion, not only did we intervene, liquidity-related issues were created in the market because no rational policy can do two conflicting things at the same time. That is, on the one hand defend the exchange rate of the national RON, and on the other hand inject liquidity into the market. (…) It’s a very difficult balance to keep. A crisis cell to deal with the situation was created with the Finance Ministry, we discussed the matter and solutions were found,” Isarescu said, stressing that the depreciation of the exchange rate was limited and liquidity in the market was also ensured for making budget payments.

„Whereas other countries have a freer float, we said it from the beginning, since 2005, that we’ll go for a managed float, a controlled float. In the period until last fall, our interventions kept away from an appreciation of the exchange rate for very clear reasons. We are running a trade balance deficit, therefore we wouldn’t have wanted to appreciate the exchange rate,” Isarescu said, stressing that a stronger national currency would have angered exporters.

„Since about fall last year, the central banks reserves haven’t increased any more. So, capital inflows have tempered, and at the end of the month you’ll see that due to the intervention to reign in the exchange rate depreciation, the reserves are shrinking, yet we are still in the optimal range,” said the BNR governor.

AGERPRES