Scenarios for the exchange rate

The high national currency volatility has become a trap for 3.8 million Romanians who have taken out loans in euro, and must pay monthly installments at RON 0.5 more for each euro borrowed, due to the depreciation of the leu, compared to April. A possible foreign currency crisis will result in significant social costs, and effects in terms of financial stability which would be difficult to measure.

"They want to force an increase in the interest rate, before the one scheduled on 7 January, if not even an intervention on the market. I believe BNR [the National Bank of Romania] will first move the interest rate, then probably intervening again. BNR's intervention on sale will be a direct one, with maximum impact and minimum consumption of the foreign currency reserve," Ciprian Dascalu, Senior Economist of Millennium Bank, told Business Standard.

In the short-run, the euro appears to be strengthening against the national currency, on the back on an overheated economy. "Now the leu is recovering due to rumors related to a possible BNR intervention on the market," according to Marie Joelle El Asmar, Treasury Manager of the BNP Paribas lender.

The depreciation of the leu above the current level of RON 3.62/€ could upset the financial stability of companies and individuals that have taken out loans in a different currency than that of income, and the 2008 inflation target, of 3.8 percent, with a margin of plus/minus one percentage point.

"The exchange rate will maintain its level by year-end, but once third quarter results on economic growth are announced, which I estimate at a mere 4.6 percent , the leu will depreciate. A stronger euro is a threat to financial stability and many companies could file for bankruptcy," said Ionut Dumitru, Chief of Department for Macroeconomic Research at Raiffeisen Bank.

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