Moreover,  BIS Review 5/2010  11  foreign-currency-denominated loans (Chart 6) posted a fast-paced growth and any rapid and excessive depreciation of the domestic currency would have generated negative chain reactions across the banking system. Hence, the central bank’s policy on forex market intervention was further steered in this new environment by the philosophy that a high volatility of the exchange rate is detrimental to the inflation target as well as to the financial soundness of the real and financial sectors. A small emerging economy with a significant openness is exposed on an ongoing basis to the threat of capital movements likely to adversely affect the stability of the financial market, the foreign exchange market in particular. Firstly, the NBR’s interventions in the foreign exchange market were meant to avoid an excessive weakening of the domestic currency, while also linking the level and the pace of the depreciation to the progress in the current account adjustment. With this goal in mind, the central bank monitored the developments in the real effective exchange rate of the domestic currency, along with the pressures on external competitiveness stemming from wage bargaining. Secondly, foreign exchange market interventions were calibrated in line with developments in foreign currency reserves. The foreign currency reserves resulting from market interventions during the overappreciation period, to which added the funds received under the financing arrangement concluded with the IMF, the EU and other international financial institutions, enabled the central bank to support the domestic currency; despite these interventions, official reserves stood constantly at safety level.

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