Erste: Romanian currency Leu will continue to depreciate by 2-3 pct over 2020-2021

The Romanian currency Leu will continue to depreciate in the following years, because of the high current account deficit, shows a report published on Friday by the Austrian group Erste, which estimates the Romanian currency will lose 2-3 per cent in nominal terms, over 2020-2021. 

The BNR (National Bank of Romania) will continue to intervene on the market to smooth out the extreme volatility of the euro/leu exchange rate, but it won't fight the market trend, appreciated the Erste analysis. 

They believe next year the chances are low for the fiscal policy to remain as relaxed as in the previous years, except for the possible implementation of the pensions law. An increase by 40 per cent in the pensions in September 2020 will constraint the Government's leeway in implementing investments or other relaxation measures, shows the report. 

"We estimate a GDP slowdown in 2020, by 3.5 per cent, from 4 per cent in 2019. The increase will be lower if the Government adopts decisive measures in terms of fiscal consolidation as asked by the European Commission," claim the Erste analysts, which draw attention that the investors' trust deteriorated in end-year. 

In 2019, BNR maintained the interest rate unchanged at 2.5 per cent. 

"We believe that the central bank will balance internal and external risks, and the interest rate will remain at 2.5 per cent in 2020. The relaxation of the monetary policy by the ECB and other major central banks, coupled with internal inflationary pressures, justifies this monetary policy strategy," the authors of the report appreciate. 

The expansionary fiscal policy is, for the moment, another important factor that prevents a reduction in the interest rate. Also, an increase is unlikely, forecasts Erste analysts. 

They expect the Ministry of Finance to use the buffer this month to cover the need for funding for 2019, stemming from a considerably higher target for the budget deficit. 

Also, the inflation rate would be close to the upper limit of the BNR target (3.5 per cent).