The mix between a harsh monetary policy and a relaxed salary policy can be harmful as the first could strengthen the leu while the second could erode competition through the increase of salaries, Central Bank of Romania (BNR) governor Mugur Isarescu told the daily Business Standard.
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The official explained a tough monetary policy means a high key interest. When combined with a rather free salary policy, it results in pressure over the current account deficit.
BNR in early February increased to 9 percent the monetary policy interest, this being the third such move since October last year, when the monetary policy interest grew to 7.5 percent and January this year, when a 0.5 percentage points increase took place.
Isarescu again called for a connection between economic policies and warned of the limits the monetary policy has if not correlated with fiscal policies.
The BNR official emphasized the efficiency of the monetary policy is eroded by the fact that Romania is now part of a common market. Another factor would be the leu’s full convertibility.
"The final effect could be the growth of the hard currency lending and the decrease of the lei credits which results in an inefficient control of the overall demand and financial instability due to the fluctuation of the exchange rate," Isarescu told Business Standard.
The central bank is currently trying to control inflation through a series of measures taken especially within the inter-banking market. Romania witnessed a 6.57 percent inflation rate at the end of 2007, thus exceeding the 4 percent target it wanted to reach.
For the end of this year, BNR is aiming at a 3.8 percent inflation rate. After the 8 percent increase in January, the central bank voiced concerns over the level of consumption which stimulates inflation.
The present interest levels for the minimum mandatory reserves imposed on banks stand at 20 percent of banks' lei debts and 40 percent for hard-currency debts.
The central bank previously explained the overall demand level it is not backed by Romania's offer for goods and services. This has two main effects: it affects the external balance of payments and stimulates inflation, which widened over BNR's 4 percent target. BNR emphasized the main reason for the high consumption level resides in the increase of salaries, which exceeds labor productivity.
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