Thursday, July 19: the leu/euro exchange rate jumps to RON4.58 to one euro on the interbank market, and the ROBOR overnight rate announced by the central bank falls to 1.58%.
The combination of a constant increase in the exchange rate and the short-term interests kept low has been going on for a number of days now, raising questions about a potential policy change of the central bank and the magnitude of the pressures for leu’s depreciation.
Did BNR decide to follow IMF’s recent recommendations about reducing interventions on the forex market and give the exchange rate more freedom? Are the foreign currency outflows so serious that the central bank could not offset them without sending leu interests through the roof as it did before?
Does the BNR prefer to protect lending in lei and the government’s financing costs instead of being concerned about the portfolios of foreign currency loans, which weigh heavily in banks’ balance sheets and may see an increase in the rate of non-performing loans because of the abrupt depreciation of the leu?
Is the central bank so afraid that it would prematurely erode its foreign currency reserve that it strengthened with the huge loan taken from the IMF in 2009, which starts being repaid next month? Is the theory that it can take the leu exactly where it wants to considering how small the market is no longer valid?
Does the central bank prefer to give the market freedom so as not to be accused that its interventions interfere with the interests of the political sides in open conflict? (And still, one of the parties is already talking about the “disastrous depreciation of the leu)
“BNR used to defend a certain exchange rate level by pulling lei out of the market. The reduction of the leu liquidity would lead to an increase in interest rates. This time, short-term depreciation cannot be avoided and BNR left liquidity on the market to prevent the exchange rate and the interests from going up at the same time,” explains Dan Bucsa, chief economist of UniCredit Tiriac Bank. “Unfortunately, the interest goes down only for extremely short maturities (up to one week) because the central bank is not using any instruments whereby to inject cash for longer term to allow an interest reduction for longer maturities (and implicitly the decline of one-month and three-month ROBOR, the reference rates for leu loans).”
All observers agree that something did change in the central bank’s attitude: it no longer resorts to aggressive interventions to protect the leu and this does not seem to be a temporary thing, because the leu has already lost more than 6% since the beginning of the year.
Vlad Muscalu, senior economist of ING Bank has three possible explanations for this: BNR has already used EUR2 billion since the beginning of the year to temper the exchange rate; the global/local situation risks worsening significantly and BNR might have to use the reserve to support the banking system and maybe even to cover part of the foreign debt of the public sector. The central bank officials, however, have recently said that the banking system does not need any special support measures at least not this year.
On the other hand, ING believes that the freedom the exchange rate has had lately could attract the speculators that over the last few years had been discouraged by the idea that the BNR keeps a tight grip on the forex market and there is hardly any room for easy profits. On short-term, the return of speculators might temper the leu depreciation, though with the ensuing risks.
Melania Hancila, Volksbank’s chief economist, believes that as far as the central bank is concerned, stimulating economy by lower rates and the IMF’s recommendations to give more freedom to the forex market prevail.
“The National Bank seems to be managing its monetary policy instruments so as to keep liquidity at an optimum level in order to pressure for a decline of interbank rates. I believe this strategy is suitable for the current macroeconomic circumstances, as an attempt is made to stimulate economy by cutting interest, and discourage borrowing in foreign currency (…)”
Whatever the explanations may be, both the central bank, and the Finance Ministry have been definitely pumping cash into the market over the last two months: BNR via the weekly repo auctions, which successfully offset its minor interventions on the forex market and the Finance Ministry via redemption of government securities, which exceeded the new issues and even via higher VAT refunds.
These cash injections pressured short-term ROBOR rates and thus created additional premises for the depreciation of the leu as long as anyone had access to cheap lei to buy euros. On the other hand securing funding for the budget deficit is not such a pressing issue, considering the Finance Ministry has covered a lot of its needs in the first five months of the year. Demand for loans remains very low, and therefore the interest rates are not that important, bankers say.
What is for certain is that on Thursday afternoon, the rates on the forex market jumped again to over RON4.58/EUR. The European Central Bank, which announces its own exchange rate two hours after BNR, announced a record RON4.5750/EUR, up 6.3% from the end of 2011 and 7.4% year on year.
Despite the theory that the fast-paced depreciation of the leu over the last few weeks was caused by the deterioration of the perception of foreign investors, the CDS have fallen over the last few days returning to the 4% threshold, in sync with the entire region.
(English version by Loredana Fratila-Cristescu)