The Speaker of the Chamber of Deputies Liviu Dragnea says in a letter made public on Friday, after the talks he had on Thursday with Prime Minister Viorica Dancila and the National Bank of Romania (BNR)’s Governor Mugur Isarescu, that the BNR is inducing a state of mistrust in the government, and in this respect, ‘I find the monetary policy must be in harmony with the government policies.’
‘From this point of view, I express my concern to the measures taken at the beginning of the year by the central bank and which from where I stand, are not the most appropriate way to co-ordinate the macroeconomic policies. I believe that an adequate monetary policy should be configured based on the fiscal-budgetary policy and in general, on the governmental policies as set through the Ruling Programme without putting a question mark to the government’s capacity to implementing the measures assumed or to accomplishing the budgetary laws’ provisions. In my opinion, a monetary policy based on mistrust and the maximization of some potential risks is not, a policy favourable to a sustainable economic growth and could eventually lead to some results contrary to the expected ones,’ Dragnea said in a letter to the BNR leadership.
He added that the reservations he has regarding the substantiation and the relevance of the measures taken in January and February 2018 are determined by the BNR releases, the monetary policy sitting minute of the BNR’s Board on 7 February 2018.
‘The quoted document says that the BNR’s Board have noticed the <>. In my opinion, in a public institution such remarks do not find their place at less than one month since the enforcement of the budgetary policy configured through the Budget Law No. 2/2018 and the Social Insurance Budget Law No. 3/2018,’ said Liviu Dragnea.
The PSD leader added that although the Parliament has approved in December 2017 the state budget laws for 2018, where both the level of the public incomes and spending and the budgetary deficit level, are defined, shortly after the BNR’s Board of Directors publicly expresses opinion that these laws are unrealistic and they will be broken.
According to Dragnea, despite the pessimistic prognoses Romania has shown a sustainable macroeconomic picture in 2017, while in 2018 the macroeconomic vision has in view a higher contribution of the investments in the economic growth and the strengthening of the policies of the purchasing power of the population, as forecast in the Ruling Programme.
Liviu Dragnea also says in his letter to Mugur Isarescu that in 2017 price have recorded rises not only in Romania, but also in Estonia, Lithuania, Latvia, Hungary, Poland.
‘The inflation calculated by the BNR has a strong statistical feature that is comparing the fixed-base index of the constant prices in the current period with the one in the same period of the previous year,’ added Dragnea.
Liviu Dragnea showed confident that the BNR knows that ‘the main causes that have determined the inflation have nothing to do with the gov’t’s action’ and that ‘these are associated to the offer and not the excess of demand.’
Liviu Dragnea drew attention that ‘the successive increases of the key interest rate at the beginning of the year, when the private sector is forecasting its businesses and investments for the year 2018, are capable to seriously harm their confidence in the Romanian economic milieu.’
Finally, he demanded the BNR a technical, very argued motivation regarding the repeated increase from the very start of the year of the key interest rate.
Central Bank’s Isarescu: BNR’s fundamental goal, to ensure prices’ stability
The central bank (National Bank of Romania, BNR, ed. n.)’s governor Mugur Isarescu says in answering to the letter released by Speaker Liviu Dragnea, after a meeting he had on Thursday with Prime minister Viorica Dancila and BNR governor Mugur Isarescu, that the central bank’s fundamental goal is to ensure the prices’ stability, in accordance with the national law and the EU norms, this being the best contribution a central bank could bring to the durable growth of the economy.
Isarescu mentions that the decisions made by the Board of Directors of the BNR in its 8 January and 7 February sittings were aimed at adjusting the behaviour of the monetary policy in the context of a significant and fast increase of the inflation rate in the last months: the yoy inflation rate calculated by the National Institute of Statistics (INS) based on the Consumption Price Index parked at 4.3pct in January and 4.7pct in February 2018 (beyond the upper limit of the target’s variation interval), as compared to 0.8pct in June 2017.
The BNR governor specifies that a possible lack of reaction by the BNR, in both the first two months of 2018 and in the perspective would amplify the risk to land the inflationary expectations at a new, increased level because the economic operators, the international bodies included, would have interpreted the BNR’s lack of reaction as a tacit acceptance, on the medium and the long term, of the respective inflation level. Moreover, the risk of the national currency’s additional depreciation would have increased.
Isarescu also said that such a context could generate new inflationary pressure and the commencement of an inflation-depreciation-inflation cycle, considering that the BNR cannot fight in any circumstances at at any level of the interest, the pressure on the currency market, in particular if they are fed by the change of perception of the investors upon the national economy.
The BNR governor also specified that an adequate mix of policies is highlighted by the BNR each and every time and is to be read in the releases of the Board following the sittings that decide measures of currency policy, and the permanent positive work between the BNR and the Public Finance Ministry is known and it is materialised, for instance, in the past months in the getting of two gainful loans for Romania from the international capital market. The collaboration is also taking place within the institutionalised framework, according to the law, of the National Committee of Macroprudential Surveillance.
According to Isarescu, the integral take over by the BNR of the administration of the aggregated demand (so to diminish the surplus demand) and the stoppage of the deterioration of the external position of the economy presumes the more intense use of the monetary policy tools, which would involve a more accentuated increase of the key interest rate.
“Should the central bank does not adopt any measures and assists passively to the risk accumulation, apart from the fact that it would break its legal mandate, its attitude would increase the risk of an abrupt adjustment, operated by the market forces, with a severe impact upon the economy,” says Isarescu in his letter.