Moldova’s headline inflation eased to 2.4% y/y in December from 2.6% y/y in November, as consumer prices increased by only 0.5% m/m, the statistics bureau BNS reported. Average annual inflation was 6.4% y/y.
Core inflation is roughly twice as high (5.6% y/y in November) and headline inflation is projected to accelerate during 2017 toward the 5% y/y target, but there is still room for interest rate cuts this year from 9% currently, particularly as financial intermediation remains sluggish.
Consumer prices moderated during 2016 after the 13.6% expansion driven in 2015 by the local currency’s weakening. The leu weakened by 13% y/y during 2015, broadly in line with the rise in consumer price inflation in the year (December/December). By contrast, the local currency strengthened in nominal terms versus the euro by around 1.5% in 2016, and this resulted in quick stabilisation of the consumer prices.
The improvement in the macroeconomic outlook after the signing of the agreement with the International Monetary Fund (IMF) last autumn stabilised the currency, and currency inflows from the IMF and other foreign development partners secured the fundamentals for the current exchange rates.
Moldova’s inflation rate is in line with the latest forecast published in October 2016 and validates the monetary policy decisions taken in 2015 and at the beginning of 2016, the monetary board concluded at its December 29 meeting while maintaining the 9% policy rate (from 19.5% one year earlier). The annual rate of core inflation was 5.6% in November 2016, decreasing by 0.3pp compared with the previous month, it said. The monetary authority is targeting 5%+/-1.5pp.
The central bank highlighted the steady effects of the lower monetary policy rates on the credit market. The volume of new loans granted in November increased by 8.5% y/y, while new attracted deposits increased by 0.7% y/y. Nevertheless, the stock of loans was still 7.3% smaller than one year earlier (while deposits were 4% up y/y).
According to a new round of forecasting issued on October 27, the average annual inflation rate for 2016 and 2017 was projected to reach levels of 6.3% and 4.6% respectively. Depending on the complexity of risks and uncertainties associated with the evolution of inflation in the medium term, the central bank has reshaped the annual average forecast for inflation compared to the previous forecast published in August 2016, reducing it by 0.4pp for 2016, and increasing it by 0.2pp for 2017.