NextFin News - Romania’s central bank has allowed the leu to slide to a record low against the euro, signaling a tactical retreat in its long-standing defense of the currency as a deepening political crisis threatens the country’s fiscal stability and billions in European Union funding. The National Bank of Romania (BNR) set the official reference rate at 5.2194 lei per euro on Tuesday, following a period of intense market pressure that saw the currency depreciate roughly 2.5% in just two weeks. This shift marks a departure from the relative stability maintained since the start of the year, when the leu hovered consistently around the 5.09 level.
The sudden volatility stems from a collapse in the governing coalition. The Social Democratic Party (PSD) recently withdrew its support for Prime Minister Ilie Bolojan and filed a no-confidence motion alongside the far-right Alliance for the Union of Romanians (AUR). This political deadlock has not only rattled currency traders but also placed approximately €28 billion in EU recovery funds at risk. Investors fear that a prolonged period of policy paralysis will prevent Romania from meeting the reform milestones required to unlock these disbursements, further straining a budget already burdened by one of the highest deficits in the European Union.
Ciprian Dascalu, chief economist at BCR, noted that the central bank appears to be prioritizing the preservation of its foreign exchange reserves over defending a specific price floor. Dascalu, who has long maintained a cautious outlook on Romania’s fiscal trajectory, suggested that the BNR is likely allowing for a "controlled depreciation" to absorb some of the external shocks. This view is supported by recent data showing that Romania’s foreign exchange reserves fell by €2.2 billion in April alone, ending the month at €64.83 billion. Market estimates suggest the central bank may have spent up to €2 billion in that month alone to prevent a more disorderly rout.
While the BNR’s managed float regime is designed to prevent excessive volatility, the scale of the current political upheaval is testing the limits of this strategy. The alliance between the PSD and the nationalist AUR has introduced a level of unpredictability that the central bank cannot easily offset with market interventions. If the no-confidence motion succeeds, Romania could face months of caretaker governance, making it nearly impossible to implement the fiscal adjustments demanded by Brussels. This scenario would likely lead to a credit rating downgrade, as the country’s twin deficits—fiscal and current account—remain among the widest in the region.
However, some market participants argue that the leu’s weakness may be temporary. Analysts at several local commercial banks suggest that once the immediate political theater of the no-confidence vote concludes, the BNR will likely re-establish a tighter trading range to anchor inflation expectations. Romania’s inflation remains stubbornly high compared to its peers, and a significantly weaker currency would only exacerbate price pressures by increasing the cost of imports. For now, the central bank’s willingness to let the leu find a new, lower equilibrium suggests that the cost of fighting the market has become too high to ignore.
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