Moldova’s central bank (BNM) further cut the policy interest rate (chart) by 50 basis points (bp) to 4.25% on February 6, pointing out that inflation remained within the target band for the third consecutive month in December.

This is the BNM’s first monetary policy decision since the replacement of its governor. Moldovan lawmakers confirmed Romanian politician Anca Dragu as the country's new central bank governor on December 22, after dismissing Octavian Armasu from the position the previous day.

The BNM last slashed the monetary policy rate by 125bp to 4.75% on November 7, marking an ambitious step of the monetary cycle that has been particularly hawkish with the policy rate reaching 21.5% during August-December 2022.

The rate cut contributes to stimulating domestic demand, the BNM said, implying that this will not have inflationary effects since the GDP gap at this point of the economic cycle is still negative.

“The decision contributes to the consolidation of this performance, further stimulating aggregate demand, [which is] currently disinflationary, including by encouraging consumption, balancing the national economy and anchoring inflationary expectations,” the report published by the BNM reads.

The impact of the BNM’s committed policy on aggregate demand and financial intermediation was particularly strong in 2022, subsequently impacting the overall economic growth that plunged to -2.3% y/y in H1 2023.

After the monetary relaxation carried out by the central bank throughout the whole of 2023, economic growth recovered to 2.6% y/y in Q3.

Headline inflation in Moldova decreased to 4.2% y/y in December from 5.5% y/y in November, dropping below the target inflation rate (5%) and the monetary policy rate at that time (4.75%).

The BNM issued an update to the Inflation Outlook along with the monetary policy decision, envisaging that the annual inflation rate will oscillate around the 5.0% target, remaining within a range of ±1.5 percentage points (pp) over the next eight quarters.

Average annual inflation will be around 4.7% this year and 4.5% next year.