The yields accepted by Moldova’s government in May for the new issues of bills and bonds with maturity of up to two years bottomed out in May, after the gradual disinflation helped them ease for the previous six months to the lowest levels in three years, according to central bank data.

The yield of one-year bills increased to 4.52% in May, up from 4.41% in April yet remaining below the 4.6% average in March. The pattern was he same for all maturities of up to one year. Moldova’s Treasury paid 3.93% for three-month bills with the yield rising gradually up to 4.52% for 12-month maturity. For longer maturities, the government has to pay a yield above the long-term inflation target: 5.61% for two-year maturity, 6.3% for three years and 6.71% for five years.

The yields for longer maturities (three and five years) remained steady but above the 5% +/-1.5pp inflation target. The yield curve flattening indicates rising concerns about inflation in the short term (compared to April) while the overall inflation outlook remains dominated by expected adjustments of administered prices that prevents the central bank from lowering the target from 5% per annum.

The dynamics of the yields in May compared to April are in line with the cautious policy of the central bank, which maintained a rather hawkish monetary policy: it repeatedly maintained the policy rate at 6.5% this year despite consumer price inflation easing to 3.7% y/y in April and is seen at around 3.3% on average this year and 4.9% y/y in 2019. The central bank, however, highlighted in its June 3 monetary policy decision the risks associated with the inflation outlook, especially for the second part of the two-year forecast horizon. The risks are generated by the rise in international oil and commodity prices and the tariff adjustment for regulated services in 2019.