Moldova’s inflation hits 7.9% y/y in October

Moldova’s inflation hits 7.9% y/y in October
By Iulian Ernst in Bucharest November 13, 2017

Moldova’s consumer price index accelerated to 7.9% y/y growth in October, from 7.3% y/y in September, the country’s statistics office reported on November 10. Consumer prices increased by 1.5% m/m in the month, driven by a 3.6% m/m rise in food prices.

The central bank expects prices to slow in coming quarters, decelerating to below 3% y/y in Q4 next year. The projection is, however, on the optimistic side given the need for an upward revision in regulated prices (particularly those of utilities). The interest rate cut introduced recently rather reflects the monetary authority's concern with slow growth in the second part of this year, possibly as an effect of tight monetary policy pursued in the past to address exchange rate issues. The strengthening of the Moldovan currency was another reason behind the rate cut, rather than the optimistic inflation forecast.

Moldova’s central bank targets inflation of 5% y/y +/-1.5pp.

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

The visible swing in the central bank’s monetary policy (albeit rate cuts were likely, given the circumstances) came concomitant with the country cutting, to below IFI projections, it GDP forecast for this year 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 had negative effects on economic growth in recent quarters.

The October inflation data shows food prices increased by 10.6% y/y as vegetable prices soared by 48% y/y. The prices of fresh fruits increased by 23% y/y. The prices of non-food items increased at a slower rate, of only 4% y/y. The cost of services were 8.7% higher than last year, as some regulated prices such as the water supply price (+22% y/y) were revised upwards.