As some of you might have noticed, right before Christmas (2011) money markets worldwide went crazy (i.e. dried up). Romania, contrary to what the Government might tell you, is not an isolated island and thus was affected via capital flows channel. In other words RON was exchanged into EUR or USD. Such move will not be seen in the liquidity of the money market it will only be seen in the exchange rate.
However, as I showed before, the National Bank of Romania is targeting the exchange rate and thus it had to intervene to stop the RON depreciation. Of course the interventions were not announced, but as usual if they are not sterilized they would lead to a lower monetary base. This can actually be seen in the money market (see the first graph). As NBR was intervening to keep the RON from depreciation the stock of money available in the money market was decreasing (of course only part of it is due to the intervention, other reasons could be responsible for the dramatic drop).
Now look at the second graph. It depicts the NBR’s repo operations (i.e. liquidity injecting monetary policy instrument) and the maturity of each operation. We see that NBR has been injecting some liquidity in the system in the last part of 2011 in an attempt to keep interest rates from rising too much. To be fair the NBR had a very difficult task in fact – but brought about by its own objectives – to stop depreciation and in the same time to make sure that borrowing costs for the Ministry of Finance remain low.
But we are now in 2012, and it seems that the dominant factor for Monetary Policy in Romania is the cost of funding for MoF. As I said before, in 2012 the NBR will accept weaker RON and even if the case may be higher inflation while in the same time keeping short term rates under control. Nevertheless, we are a long way until the monetary conditions will be similar to those before October 2008. This means that the private sector cannot expect better funding conditions and it will have to increase productivity to push the economy/output forward.