The Romanian Anti-Inflation Policy on the Road to the European Union

Abstract

The importance of understanding the complex mechanism of inflation and its main generating and amplifying factors justifies the attention and continuous focus maintained by experts, financial institutions, authorities and the independent analysts, especially in developing countries. Inflation is the main imbalance factor that Romanian economy faced during the last 16 years. Despite the positive evolution in the near past, this country is still the one with the highest inflation level among countries during the transition period. Only at the end of 2005 did Romania reach a single digit inflation rate - 8.6 percent, according to the NBR most recent report.The main reasons for this delay are: the late prices' liberalization, compared to the other countries, the inconsistency in the economic programs and the relatively late start of NBR in the strategy of competitive disinflation and re-monetization of the economy using intermediary targets. This type of monetary policy continued until July 2005. Starting August 2005, NBR initiated the inflation targeting, which implies: the public announcement of a quantitative inflation target; the price stability set as main goal of monetary policy (ideally the central bank law should define price stability as primary objective); a wide set of information and good macroeconomic data; the technical capacity of NBR to forecast inflation; the ability to set monetary instruments at levels consistent with the inflation target; an increased level of transparency. This strategy will be applied in Romania until the ERM II, after EU joining, because the NBR has considered inflation targeting to be the most appropriate medium term monetary policy framework. As we know, the adoption of Euro requires countries to participate in the ERM II for two years and meeting the set Maastricht criteria:* Inflation - lowest 3 EU members plus 1.5 percent during one year (approximately 2.3 percent);* Fiscal deficit - below 3 percent of GDP;* Public debt - below 60 percent of GDP;* Long-term interest rates - below average of the three low inflation countries plus 2 percent;* Exchange rates - within the EMS band ( /- 15 percent) for 2 years with stability around the central rate.Despite years of reform and relative macroeconomic stability, Romania still faces many challenges before meeting these criteria. It may need a few years before Romania being ready to enter the monetary union, being a long way from fulfilling the inflation target. It is very difficult to reduce the inflation from 8.6 percent to 2.3 percent. The NBR Governor, quote: "We say that we will reach to this level in 2008, but, most probably, we will get there in 2010". The stability of the Currency Board and the relatively low inflation in recent years are likely to make it easier for Bulgaria to enter the ERM II than for Romania, which needs to further stabilize its economy . If is not sufficiently prepared, Romania could postpone the initially set date of 2014 for the switch to European currency.