mugur isarescu : the 39th meeting of the central banks governors ’ club of the central asia, black sea region and balkan countries speech by mr mugur isarescu, governor of the national bank of romania, at the conference " the 39th meeting of the central banks governors'club of the central asia, black sea region and balkan countries ", bodrum, turkey, 14 may 2018. * * * dear colleagues, let me start by saying that i am honoured to have been invited to speak here, in beautiful bodrum, at the 39th meeting of the central banks governors ’ club of the central asia, black sea region and balkan countries. our club includes central banks from eu countries, some already in the eurozone, while others belong to countries outside the eu. some of the members in our group come from countries that have enormous economic potential and belong to g20, which has become an essential part of the architecture that has fostered international debate on financial and economic issues after the crisis. this is why our club reflects quite interestingly the constellation of political and economic interests that defines our world. this meeting comes at a time when the international landscape is dominated by an overall positive mood, on the economic front at least, even though, recently, a number of downside risks have become more apparent. in the european union, economic growth reached in 2017 its postcrisis peak, with most member states witnessing higher gdp dynamics. at the same time, unemployment continued on a downward path and economic sentiment improved across the board. some recent signals point to a slowdown, yet they seem to have more to do with temporary influences, growth prospects continuing to look strong. the past year recorded, on average, positive developments in eu candidate and potential candidate countries as well, in spite of gdp dynamics delivering a more mixed picture ( from over 7 percent in turkey to around 2 percent in serbia and even stagnation in the former yugoslav republic of macedonia ). nevertheless, the outlook is positive, with recent forecasts pointing to relatively robust growth in the coming years. however, against this relatively rosy background, i should highlight that our economies, even those that belong to the eurozone, have still much to do in order to become robust and offer good living standards to most of their citizens. some members of this club, romania included, had to go through very painful adjustments during the past decade, as the global crisis found them trapped in a pro - cyclical policy stance and it remains to be

as an outlier within the group : while its current deficit is well below pre - crisis levels, it widened rapidly from a minimum of 0. 7 percent in 2014 to 3. 4 percent in 2017, which puts romania closer to the group of eu candidate countries ( around 5. 5 percent in serbia and turkey ). against such a background, it is no wonder that – while the monetary stance remains largely accommodative –, the picture is quite heterogeneous regarding inflation expectations, inflation targets, and policy tools used. romania has already started the tightening of monetary policy by hiking the rate three times this year, after further narrowing the corridor around the policy rate last year, but going forward we believe a gradual approach is warranted. and this brings us to the issue of monetary policy normalisation. what i believe most people understand by this concept is a return to the standard operating mode of monetary policy, i. e. the withdrawal of the unconventional policy tools deployed during the crisis, which would entail a gradual increase in short - term interest rates and a gradual unwinding of bloated central bank balance sheets. the latter is by far the most challenging process, as the impact on global asset prices is a delicate issue, which not only requires good planning and favorable macroeconomic conditions, but is also bound to be lengthy. as regards the other element of policy normalisation – the increase in short - term interest rates –, while less controversial, it is by no means problem - free, considering its implications for financial stability. to quote the bis annual report 2017, “ policy normalisation presents unprecedented challenges, given the current high debt levels and unusual uncertainty ”. the increase in short - term interest rates is an element of normalisation that also applies to the central banks that did not step out of the conventional framework – and this is the case in most central, eastern and south - eastern european countries. personally, i see normalisation as amounting ultimately to a return to real positive interest rates. i doubt, however, that this will be a swift process. in the case of romania, the steps taken so far along the road to policy normalisation, were facilitated by two favourable developments in the banking sector. first, the npl ratio dropped from above 20 percent at end - 2014 to almost 6 percent presently, making it the largest adjustment in the eu over a relatively short time period. at the core of this adjustment were conservative requirements for provisioning npls, our hands