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Romania leu facing normal correction

The Romanian leu’s sharp fall to a one-year low is part of a natural correction towards levels in line with the country’s economic fundamentals, an adviser to the central bank governor said on Wednesday – reports the Guardian.

Lucian Croitoru also said the bank was focused on inflation figures when assessing the need to curb demand rather than on the currency’s exchange rate. But he said a weaker leu could still play a role in interest rate decisions. Asked about the decline of the leu, Croitoru told Reuters: “It is normal, because the unit is returning from a unsustainable level reached in July. What is going on now is part of a correction process towards a level more consistent with fundamentals in Romania. The leu fell as low as 3.5430 per euro on Wednesday, its lowest level since October 2006. It has shed some 13% since hitting a five-year high in July.

Analysts have said the decline is mainly due to concerns about Romania’s long-term economic prospects as international observers have warned that the new European Union member faces overheating. Standard & Poor’s cut its outlook on Romania to negative from stable in November, saying it was concerned about an insufficient policy response to a ballooning external deficit. Referring to the leu weakening Croitoru also said: “Turbulence on the international financial markets has really helped that.”

Earlier this month the central bank revised up its inflation forecasts for this year and next, due to rising food costs and a worsening outlook for the leu. It also raised interest rates by half a percentage point to 7.50% in October. Croitoru moved to water down any expectations that the latest bout of leu weakening was putting pressure on the central bank to continue raising borrowing costs. “The central bank is adjusting its (monetary policy) intervention regarding inflation in accordance with inflation, not in accordance with the exchange rate,” he said when asked about such potential pressures. But he said some impact on rates may be inevitable. “If you ask me about the effect of depreciation (on inflation), I can say that it is bigger than an appreciation can have on deflation. So, it is possible for (the weaker leu) to be a factor that can influence a (rate) decision. But I think that the current exchange rate level is more in line with fundamentals and that is needed to happen.” (