The National Bank of Romania took on the risk of denting its credibility, by missing the inflation target for the third consecutive year (at 4.74%, the inflation exceeded the maximum limit of 4.5%) because the cost of slowing down inflation would have been an even stronger contraction of the economy, governor Mugur Isarescu explained yesterday, in his first public appearance this year.

"When you set an inflation target it is good to have both the Government and the fiscal policy on your side, otherwise (reaching the target i.e.) is extremely costly. When we make this decision we have to be aware of its impact on economic growth, on negative GDP growth," Isarescu said at a conference organised at the NBR. Isarescu left the conference discreetly before it was over, thus avoiding the usual informal talks with the press at the end of events.

The economy contracted by around 7% last year amid a collapse in consumer spending and in investments. The NBR has kept RON interest rates very high over the last two years, anyway, in order to counter the budget deficit (banks received a good interest to place their money with the Ministry of Finance), as well as to ease pressures on the RON/EUR exchange rate. At 7.5% a year, the NBR's key interest rate remains the highest in the EU, although it was cut by 0.5% at the beginning of January.

Isarescu said on the other hand that the negative GDP, i.e. the gap between the supply in the economy and aggregate demand is very wide, which means "inflation needs to go down".

The National Bank of Romania took on the risk of denting its credibility, by missing the inflation target for the third consecutive year (at 4.74%, the inflation exceeded the maximum limit of 4.5%) because the cost of slowing down inflation would have been an even stronger contraction of the economy, governor Mugur Isarescu explained yesterday