Consumer prices decreased by 0.5% m/m in February and annual inflation eased for the second consecutive month to 10.3%, from 13.4% y/y in January and 13.6% y/y in December, the Moldovan Statistics Bureau said on March 10.

Consumer prices, fuelled at the beginning of last year by the local currency’s sharp depreciation, stabilised in line with the exchange rate. However, the local currency has stabilised at around MDL22 to the euro, versus MDL18 before a sharp depreciation that started in autumn 2014. The 18% weakening of the local currency versus the euro – or the 22% strengthening of the euro versus the local currency - exerted major pressure on the prices of consumer goods, most of which are imported.

The exchange rate and, consequently, consumer prices adjusted in response to lower wage remittances and exports following the deterioration of the economy in CIS countries.

Food prices decreased by 0.4% in February but they were still 11.8% up y/y. Prices of fruits and vegetables increased particularly strongly over the past year, by 24% y/y and 35% y/y respectively. Their combined contribution to the CPI was 1.8pp.

Another significant contribution, 1.4pp, was made by the electricity price, which also increased by 34.5%.

Moldova’s central bank cut its forecast for this year’s average inflation to 10.1% y/y, from 11.9% projected in November. Average inflation will further ease to 6.6% y/y in 2017, according to the latest Inflation Report published by the central bank on February 4. Headline inflation will return within the 5%+/-1pp inflation targeting band in Q3, 2017.

The central bank cut the monetary policy interest rate by 0.5pp at its February 25 monetary policy board meeting, after maintaining the rate at this particularly high level since last August. The rate cut follows the moderation of headline inflation in line with projections, the central bank explained.

Moldova’s central bank gradually tightened its monetary policy between the end of 2014 and August 2015, raising the monetary policy rate from 3.5% to 19.5%. The move was explained by the inflationary pressures generated by the local currency’s depreciation in early 2015 amid problems in the banking sector that culminated with the liquidation of three banks and losses equivalent to 10% of GDP that will be paid from the state budget.