Moldova’s central bank slashed its base rate by 200 basis points to 5.50 percent, noting the bank’s governor, Octavian Armasu, in the latest inflation report had said monetary policy would have to be relaxed as inflation is expected to decline next year.
It is the first rate cut by the National Bank of Moldova (BNM) since it raised its rate in June and July by a total of 100 basis points to lower inflationary pressures from rising aggregate demand.
NBM added the rate cut was aimed at keeping inflation within the bank’s target range of 5.0 percent, plus/minus 1.5 percentage points, the optimal rate to develop the national economy.
Moldova’s inflation rate has accelerated steadily this year from a combination of high demand from higher wages, pensions and consumer credit in the first half of 2019.
In November inflation rose to 7.1 percent from 6.8 percent in October and 2.2 percent in January.
The leu rose further today to trade at 17.3 to the U.S. dollar, up 5.2 percent since mid-June to be largely unchanged since the start of the year.
In its November inflation report, the central bank forecast inflation would hit a maximum of 8.0 percent in the fourth quarter of this year and then decline continuously until the end of 2020 before stabilizing near its inflation target by the end of its forecast horizon.
In the report it also said aggregate demand will remain pro-inflationary during this year and then become disinflationary starting in the first quarter of 2020 while real monetary conditions will remain restrictive during the entire forecast period.
“Under the disinflationary conditions of 2020, the NBM decision will support the competitiveness of the economy and stimulate lending activity,” the central bank said.
In addition to lowering the base rate, BNM also cut the interest rate on loans and overnight deposits to 8.5 percent from 10.5 percent and to 2.5 percent from 4.5 percent, respectively.
To encourage financial intermediation in the lei and discourage intermediation in foreign currencies, the central bank lowered the compulsory reserves in in lei and non-convertible currencies while it raised the ratio for freely convertible currencies.
The gross domestic product of Moldova, between Ukraine and Romania, rose by an annual 5.8 percent in the second quarter of this year, despite political instability, and the World Bank has projected growth of 3.6 percent in 2020 and 38 percent in 2021 as growth in the country’s trading partners strengthens.
Last month Moldova’s new prime minister raised the possibility of a pause in cooperation with the International Monetary Fund after the ex-Soviet republic said it was negotiating a $500 million loan with Russia.
This indicated a possible pivot back toward Russia by the former-Soviet republic after the previous pro-Western government suffered a no-confidence vote five months after taking over.
Moldova has received $157 million out of a 3-year $183 million IMF program that expires in 2020, according to Reuters.
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