The National Bank of Moldova (NBM) has now cut its rate by 150 basis points this year following a cut in June, and by 1,200 points since February 2016 when it began its easing cycle.
Moldova's inflation rate was steady at 7.3 percent in July from June, above the central bank's target of 5.0 percent, plus/minus 1.5 percentage points.
But core inflation was 5.0 percent, up from 4.7 percent, in line with the bank's forecast as inflation has been accelerating due to supply factors and a rise in the tariffs on some regulated services along with the effect of a low base in 2016 from changes in the excise duty on some goods.
"The aggregate demand is moderate and will not create additional inflationary pressures," the NBM said.
In its August inflation report the central bank said the country's output gap will remain negative over the next four quarters and while it should turn positive in the following four quarters inflationary pressures will remain insignificant and the exchange rate will have a restrictive effect on conditions.
Inflation in the third quarter of this year was forecast to remain high and reach a maximum of 7.4 percent but then fall to a minimum of 3.5 percent in the fourth quarter of 2018 and in the first quarter of 2019.
Moldova's economy showed signs of a slowdown in the second quarter, the bank said, after first quarter Gross Domestic Product shrank by 0.7 percent from the previous quarter for annual growth of 3.1 percent, down from 6.7 percent.
Exports in April-May rose by an annual 8.7 percent while imports rose 19.8 percent while industrial output fell by 0.2 percent and retail trade turnover fell by 1.2 percent, the NBM said. Volume of transported goods rose by 20.8 percent in the same period while services activity rose by 8.0 percent.
Moldova's leu has firmed steadily this year and was trading at 17.7 to the U.S. dollar today, up 12.2 percent this year.
The National Bank of Moldova issued the following statement:
"Within the meeting of 28 August 2017, the Executive Board of the National Bank of Moldova adopted the following decision by unanimous vote:
1. to decrease the base rate applied on main short-term monetary policy operations by 0.5 percentage points, from 8.0 to 7.5 percent annually.
2. to decrease the interest rates:
- on overnight loans by 0.5 percentage points, from 11.0 to 10.5 percent annually;
- on overnight deposits by 0.5 percentage points, from 5.0 to 4.5 percent annually.
- on overnight loans by 0.5 percentage points, from 11.0 to 10.5 percent annually;
- on overnight deposits by 0.5 percentage points, from 5.0 to 4.5 percent annually.
3. to maintain the required reserves ratio from financial means attracted in MDL and non-convertible currency at the current level of 40.0 percent of the base.
4. to maintain the required reserves ratio from financial means attracted in freely convertible currency at the level of 14.0 percent of the base.
The decision was taken based on the recent macroeconomic analysis and assessments, as well the risk estimations of inflation evolution on short and medium term. Thus, inflationary pressures on medium-term have offset due to the slowdown in economic activity and appreciation of the national currency in real terms.
The decision adopted by the Executive Board of the NBM aims to create real monetary conditions able to maintain the inflation within the range of ± 1.5 percentage points from the 5.0 percent target on medium-term.
In the same context, NBM will continue to manage the liquidity excess through sterilization operations, according to the announced schedule.
In July 2017 The annual inflation rate [1] recorded 7.3 percent being similar to the previous month and continued to be above the upper limit of the range of ± 1.5 percentage points from 5.0 percent inflation target.
The annual rate of core inflation[2] was 5.0 percent in July 2017, increasing by 0.3 percentage points compared to June 2017.
The inflation evolution in July 2017 is in line with the last forecasts of the NBM. Thus, inflation accelerated since early year, due to the factors of supply along with the effect of adjusting certain utilities tariffs. The aggregate demand is moderate and will not create additional inflationary pressures.
Data for the first two months of the second quarter of 2017 show signs of slowdown in economic activity. Thus, the annual growth rate of exports in July 2017 reached the level of 8.7 percent, while that of imports of 19.8 percent. At the same time, the annual growth rate of industrial output volume was minus 0.2 percent, the volume of transported goods increased by 20.8 percent. The turnover of retail trade in real terms decreased by 1.2 percent during the same period, while the turnover of enterprises services rendering as main activity increased by 8.0 percent.
In July 2017, lending and saving processes recorded similar developments. The total volume of new granted loans and deposits attracted by licensed banks during the reporting period increased by 0.5 and 0.3 percent, respectively, as compared to July 2016.
The weighted average interest rate on new deposits attracted in MDL recorded in July 2017 an insignificant decrease of 0.03 percentage points compared to the previous month, accounting for 10.00 percent annually. In July 2017, the average rate of new deposits granted in national currency decreased by 0.43 percentage points compared to the level recorded in June 2017, accounting for 5.24 percent annually.
The NBM will further monitor and anticipate the domestic and external economic developments, so that by the inflation targeting strategy to ensure price stability in the medium term.
The next meeting of the Executive Board of the NBM on monetary policy will take place on 27 September 2017, according to the announced schedule."
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