Moldova raises rate 5th time, and RRR on inflation rise

      Moldova's central bank tightened its monetary policy stance sharply at another extraordinary meeting of its executive board - citing the recent acceleration in inflation - by raising its interest rate for the fifth time and increasing the required reserve ratio for commercial banks.
     The National Bank of Moldova (NBM) raised its interest rate on its short-term monetary policy operations by another 2 percentage points to 8.50 percent and has now raised it 5.85 percentage points since it began tightening in July last year by raising the rate and followed this up with rate hikes in September, October, December and today.

     The rate hike in October was also decided by the bank's board at an extraordinary meeting that was held in response to the country's energy crises triggered by the expiry of a gas contract with Russia.
     NBM today also raised the ratio on required reserves for commercial banks' deposits in the Moldavian leu by 2 percentage points to 28.0 percent, returning it to its level prior to a cut in April 2021. 

    The ratio on deposits on convertible foreign currencies remains unchanged, the bank said.
    The rate on overnight loans and deposits was also raised by 2 percentage points to 10.50 percent and 6.50 percent, respectively,
    "The configuration of monetary policy aims at tempering inflationary pressures to lessen the effects of shocks on the economy for its faster return to balance," the bank's board said, adding it had also raised its forecast for inflation in coming quarters amid rising global inflation.

     Inflation in Moldova, Europe's poorest country, rose to 13.94 percent in December from 12.4 percent in November for the highest rate since June 2008 and well above NBM's target of 5.0 percent, plus/minus 1.5 percentage points.

     The central bank said the recent rise in inflation illustrated the vulnerability of domestic inflation to external developments while demand is also putting upward pressure on inflation as disposable income and consumer credit its rising.

     New loans in leu rose 46.7 percent year-on-year in December, close to a historical record, and NBM said the increase in the interest rate and reserve ratio aims to reduce the growth in consumer credit, which it said had "a strong pro-inflationary impact and puts pressure on the current account deficit of the balance of payments, trade balance and exchange rate."

     In December the International Monetary Fund's (IMF) executive board approved Moldova's request for funds under its extended fund and credit facilities, enabling disbursement of US$79.8 million, with total payments under the 40-month program amounting to $558.3 million.

     Moldova's economy is recovering after an estimated contraction of 7.0 percent in 2020 due to the COVID-19 pandemic and drought, with IMF forecasting growth in 2021 of 7.5 percent and 4.5 percent in 2022.

     The National Bank of Moldova issued the following statement:

"The analysis and evaluation of recent macroeconomic information related to the external and internal environment, especially the recent acceleration of inflation, have led to an extraordinary meeting of the Executive Board of the National Bank of Moldova. At the meeting, it was decided unanimously to increase the core rate applied to the main short-term monetary policy operations by 2.0 percentage points to 8.50 percent annually. Also, the interest rates on overnight loans and deposits will be increased by 2.0 percentage points - up to 10.50 and 6.50 percent, respectively.

At the same time, the required reserves ratio from financial means attracted in MDL and non-convertible currencies is increased by 2.0 percentage points and is set at 28.0 percent of the base, starting with the maintenance period of 16 February – 15 March 2022 of the required reserves in MDL. The required reserves ratio from the financial means attracted in freely convertible currency remains unchanged.

The configuration of monetary policy aims at tempering inflationary pressures to lessen the effect of shocks on the economy for its faster return to balance. The central banks make use of such measures, revising their inflation forecasts upwardly for the coming quarters amid rising global inflation.

The recent acceleration of inflation indicates the vulnerability of the domestic inflationary process to external developments and explains the recent speeding up of inflation, which is mainly due to supply shocks from the perspective of rising international and regional prices for food, energy and other raw materials with repercussions on import prices. At the same time, the demand also puts pressure on inflation in the context of increasing disposable income and consumer credit, which determined the increase in prices of the subcomponents of core inflation and in food prices.

In this context, the new loans granted in the national currency maintained the growth trend in December 2021 close to the historical maximums, their volume increasing by 46.7 percent in annual terms.

Thus, the increase of the core rate in combination with the increase of the required reserve ratio are aimed at reducing the growth rates of consumer credit, which currently has a strong pro-inflationary impact and puts pressure on the current account deficit of the balance of payments, trade balance and exchange rate.

The National Bank of Moldova will continue to closely monitor developments in the domestic and international environment and is ready to take the necessary measures to achieve its fundamental objective of ensuring price stability."

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