Stronger currency helps stabilise Moldova’s inflation

Stronger currency helps stabilise Moldova’s inflation
By bne IntelliNews July 11, 2018

Headline inflation in Moldova accelerated slightly to 3.2% y/y in June from 2.8% y/y in May, while remaining below the 3.7% y/y figure in April, the statistics bureau informed.

Food and administered (energy, utilities) prices keep playing a key role in the dynamics of inflation in Moldova. On average, food prices increased by 5.1% y/y in June, accelerating from 4.2% y/y in May. Fuel prices rose by 10.6% y/y, accelerating from 7.7% y/y in May. The price of electricity, which is more under the control of the authorities, decreased by 1.1% y/y.

The local currency, which has constantly strengthened versus the euro over the past couple of years, has 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 3.3% 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.

As the monetary transmission mechanism is hardly functioning, the central bank prefers to keep a hawkish monetary policy with its 6.5% policy rate maintained constant in his latest board meetings. The risks of hurting growth are not high, and the International Monetary Fund has actually improved its outlook on Moldova’s growth rate which it sees at 3.8% this year. Such rates, not far from the country's potential at this moment, are, however, insufficient for the desired economic convergence with its peers in the region.

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