The strengthening of the monetary policy in the 2005-2006 period, led to the unsustainable strengthening of the leu and caused a boom in loans denominated in foreign currencies, Mugur Isărescu, the governor of the Romanian National Bank said yesterday in a seminar on monetary policy.

He said: "The more we strengthened the monetary policy, because the second channel was expanding (ed. note: lending in foreign currencies) and we needed to offset that, the more we attracted speculative capital, causing the leu to strengthen. Was the simple theory of strengthening monetary policy working? Did something good come out of it? No, something that was relatively bad did".

The Governor of the Central Bank added that this mechanism created a vulnerability which inflated the "bubble" of lending in foreign denominated currencies, which "entrapped" many people.

Mr. Isărescu added that inflation is a monetary phenomenon, but one which has multiple ramifications. He quoted Henry Wallich (former member of the Federal Reserve): "To say that inflation is merely monetary phenomenon is the same as saying that shooting a man is merely a ballistics phenomenon (...) It"s not just a tautology, but it does put the spirit to sleep".

Furthermore, the Governor of the NBR explained, in yesterday"s monetary policy seminar, that in the long run the significant increase in the money supply causes prices to rise, but in the short term the correlation isn"t as obvious.

Mugur Isărescu said that the money supply is larger in countries with low inflation than in those with high inflation, but people perceive the phenomenon the other way around, due to the velocity of money, which is inversely proportional with the confidence in the Romanian currency. In a country which has low inflation, money is "preserved", and in a country with high inflation, money circulates faster, he