Moldova’s headline inflation dropped to 4.7% y/y in March (versus the 5% +/-1pp target band), opening the door for the resumption of the monetary rate lowering cycle that was suspended by the central bank after the last cut in December. 

The final decision depends, however, on the monetary authority's confidence in banks' capacity to accommodate the new regulations implemented last year. Furthermore, the situation at the country's largest two banks remains complicated after major stakes were confiscated from non-transparent shareholders; the central bank is still seeking strategic investors for the stakes.

Price stability and a more sustainable macroeconomic outlook resulted in better terms for the government on the local public debt market: not only did the cost of public debt decrease (to 4.6% in March from 8.1% last June, for one-year bills), but the Treasury was also able to issue five-year bonds in March (at a 6.7% yield) for the first time.

Inflation tripled last year from 2.4% at the end of 2016 to 7.3% at the end of 2017, amid a combination of higher food prices and upward hikes of administered prices. The annual rise of non-food prices eased to 2.4% y/y in March (from 4.1% y/y in December) while the fees paid for services were only 1.3% up y/y compared to 7.9% y/y as of December. Food prices kept rising, however, by 8.8% y/y as of March, a rate that is not much lower than the 9.7% y/y figure at the end of last year. Prices of vegetables increased by nearly 13% ytd (+40% y/y ) and those of the fruits by nearly 18% ytd (+25% y/y).

The central bank is expected to revise downward the inflation outlook after the energy market regulator cut the end-user natural gas prices in March retroactively by 20% effective January, prompting a 0.4pp-0.5pp revision in the January-February inflation rates. The central bank had already cut the projection for average inflation in 2018 from 4.0% y/y to 3.7% y/y, expecting the prices to accelerate to 4.7% y/y in 2019, according to the February Inflation Outlook made public by the monetary authority.

The inflation slowdown in January-February (before the revision) had already confirmed the central bank’s expectations, thus creating room for further cuts in the monetary policy rate (6.5% at this moment) — depending, however, on the completion of reforms in the banking system. This remains a problematic issue as the progress in the settlement of the situation at the country’s two largest banks (namely the sale of large stakes) is sluggish and certainly slower than initially expected by the monetary authority.

Despite the progress marked by the central bank and lawmakers in helping the banking system recover from the 2014 crisis, there is still much to be done and confidence will be restored only slowly.

Moldova has gradually cut the monetary policy rate from 19.5%, which it reached in September 2015 after $1bn banking frauds were revealed and the local currency plunged. In its latest decision on March 1, the central bank maintained the policy interest rate (used to drain one-week funds) at 6.5%.