Moldova’s central bank cut the policy interest rate by 50bp to 7% at its October 25 monetary policy board meeting. The central bank also made it clear that further rate cuts will follow, since the headline inflation will drop during Q3 and will remain for three consecutive quarters below the 5%+/-1.5pp targeted inflation band.

At the previous monetary board meeting at the end of September, the central bank said it "needed to evaluate the impact of past monetary policy decisions" and did not imply imminent cuts of the magnitude announced on October 25. 

The visible swing in central bank’s monetary policy (albeit rate cuts were likely, given the circumstances) came concomitant with the country cutting down, below IFIs projections, the forecast for this year’s GDP (to 2.4%). The tight monetary policy, engaged in previous years to fight inflation generated by the crisis in the banking system and the drop in foreign currency inflows, might still have negative effects on economic growth in recent quarters.

Exporters have indeed expressed concerns about the strengthening of the local currency recently, but this was rather the effect of stronger inflows of wage remittances from abroad than an effect of the monetary policy. The central bank could, however, smooth the effect of the volatile inflows (by interventions on the foreign exchange market) but at this moment it is unclear whether the rise in inflows is permanent (or long-term) or temporary. 

Another possible driver for the interest rate cut might have been the sluggish financial intermediation. The loan portfolio contracted by 8% y/y and it accounted for less than half of total assets: 40%, or MDL31.36bn, at the end of September 2017. Furthermore, some 17% of the loans are non-performing loans (NPLs), which hence generate no revenues, and that have already been provisioned.

The central bank maintained, at its October 25 monetary board meeting, the required reserves ratio for local currency liabilities at the very high level of 40%, and the ratio for foreign currency liabilities at 14%.