Moldova's central bank changed course and raised its main interest rates for the first time in two years after loosening its policy stance earlier this year, saying its latest forecast shows inflation may exceed the upper limit of its target range due to rising domestic demand in an environment of rising global inflation.
The National Bank of Moldova (NBM) on July 30 raised its base rate by 1 percentage point to 3.65 percent, the first rate hike since July 2019, but left the level of banks' required reserves unchanged.
The central bank also raised its other main interest rates by the same 100 basis points, increasing the rate on overnight loans and deposits to 6.15 percent and the deposit rate to 1.15 percent, respectively.
In December 2019 NBM began easing its policy and continued during the COVID-19 pandemic, lowering the rate six times by a total of 4.85 percentage points, with the final cut in November last year.
Although the central bank's executive committee has kept the rate steady until now, it has still been easing its policy stance by lowering the reserve requirement three times by a total of 6 percentage points.
The central bank also raised its other main interest rates by the same 100 basis points, increasing the rate on overnight loans and deposits to 6.15 percent and the deposit rate to 1.15 percent, respectively.
In December 2019 NBM began easing its policy and continued during the COVID-19 pandemic, lowering the rate six times by a total of 4.85 percentage points, with the final cut in November last year.
Although the central bank's executive committee has kept the rate steady until now, it has still been easing its policy stance by lowering the reserve requirement three times by a total of 6 percentage points.
In March this year the reserve requirement was cut once to help boost inflation and then it was cut twice in April to counter tight liquidity in the banking system and maintain monetary stimulus during a fragile economic recovery.
The required reserve ratio on banks' domestic currency and non-convertible currencies is currently 26.0 percent while the ratio on convertible currencies is 30.0 percent.
The required reserve ratio on banks' domestic currency and non-convertible currencies is currently 26.0 percent while the ratio on convertible currencies is 30.0 percent.
There was little warning of the sharp shift in policy stance, with the bank in June saying it was leaving its rate and reserve requirement steady as domestic demand was modest, fiscal momentum weak and the overall economic recovery fragile.
But in recent months Moldava's inflation rate has been ticking up and rose to 3.2 percent in June, the fifth monthly increase from a recent low of 0.2 percent in January, and the bank said its latest inflation forecast, which will be released on Aug. 6, indicated a risk that inflation would exceed the upper limit of the bank's target range of 5.0 percent, plus/minus 1.5 percentage points.
"At the same time, inflationary pressures are supported by aggregate domestic demand, which is fueled by the recovery in household consumption against the backdrop of rising wages, the volume of new loans and remittances," NBM said.
The improving domestic demand comes against the backdrop of a faster-than-expected recovery of the global economy and Moldova's main trading partners and persistent high prices for oil, raw materials and food, the bank said, adding:
"Thus, the inflationary process will be persistent and not temporary," adding in these circumstances it is imperative for fiscal and monetary policy to synchronize their macroeconomic policies.
In the first quarter of this year Moldova's gross domestic product grew an annual 1.8 percent after shrinking three quarters in a row and the bank said industrial production had risen 4.4 percent in April-May from last year, retail activity was up 24.3 percent, turnover in services was up 40.6 percent and imports were up 13.3 percent.
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