The National Bank of Moldova (BNM) slashed by 3pp to 17% the monetary policy rate, announcing expectations for quick disinflation throughout this year and hopes for the annual inflation to enter the target band (5% +/-1.5pp) in the second quarter of 2024.
It is the second rate cut after BNM hiked the key rate at 21.5% in August to fight rampant inflation and will definitely be followed by other similar steps.
The decision on February 7 might have been encouraged by the sharp economic decline seen in H2 last year and by the government’s reliance on the domestic debt market for financing infrastructure investments. The Eurobond option remains remote, certainly not likely this year.
The central bank explained its decision as being aimed to stop the economic decline by encouraging aggregate domestic demand and consumption, among others by activating the monetary transmission mechanism (stimulating lending). Indeed, the financial intermediation measured by the stock of loans per GDP, already very low in Moldova, eased from 22.6% at the end of 2021 to 21.1% one year later.
Moldova’s inflation, 30% year on year as of December, peaked at 34% y/y in August-October last year as the country was adjusting regulated energy prices and was facing high food prices.