Moldova’s central bank maintained the policy interest rate at 6.5% at its July 27 monetary policy board meeting, resulting in a 9.5% Lombard interest rate for the overnight credit facility, despite easing inflation that measured around 3% y/y for the third month in a row in July. The next monetary policy board meeting is scheduled on September 4 when the rate is likely to remain at 6.5%. It also maintained the required reserve ratio for local currency deposits at 40% (and 14% for foreign currency deposits), which poses supplementary obstacles for financial intermediation.
The hawkish monetary policy indicates that the central bank is not yet ready to allow financial intermediation to become a relevant growth driver, as it most likely considers the healing of the banking system is not yet completed. The banking sector reforms initiated in 2015 have not yet resulted in the country’s largest banks having credible majority owners yet (except for Victoriabank); Moldova’s two largest banks are still seeking strategic owners.
Moldova’s monetary authority has maintained the policy rate at 6.5% since the beginning of 2018, after it cut it by 250bp during 2017 from 9% at the end of 2016. It had to hike the rate up to 19.5% in 2015 amid the rising inflation and exchange rate slippage prompted by the banking system crisis. The lowering of the rate since then paralleled the cleaning of the banking system (including by tighter regulations).
Inflation will accelerate in H1 next year due to the low base created this year, higher crude oil prices on international markets and the stimulative fiscal policy adopted this year by the government, the central bank explained.
“ [T]he inflation trajectory is expected to reverse at the beginning of the next year. … In addition, according to the current forecast, aggregate demand will continue recording moderate values for the next eight quarters under the influence of existing monetary conditions, fiscal policy as well as domestic and external factors,” the central bank explained.
Moldova’s central bank marginally cut its inflation forecast for this year to an average rate of 3.2% y/y compared to 3.3% previously, while maintaining its projection for 2019 at 4.9% y/y, in its latest quarterly Inflation Report on August 5. Moldova’s central bank targets 5% +/-1.5pp inflation.
The local currency, which has constantly strengthened versus the euro over the past couple of years, helped the price stabilisation after inflation neared 8% y/y last October. But the regulated prices are still kept at low levels and their liberalisation along the path of economic reforms has the potential to push up inflation, seen by the central bank to accelerate from 3.2% this year (the annual average rate) to 4.9% y/y in 2019. And yet, even at 4.9%, inflation would stay below the 5% inflation target set by the monetary authority.