Moldova cuts rate 3rd time 2020 to keep inflation on target

August 7, 2020

By CentralBankNews.info

The central bank of Moldova cut its policy rate for the third time this year and its reserve requirement for the second time to keep inflation in its target range and counter the disinflationary pressures from measures to contain the Covid-19 pandemic and lower fiscal spending.

     The National Bank of Moldova (NBM) lowered its base rate by 25 basis points to 3.0 percent and narrowed its interest rate corridor by 100 points by lowering the rate on overnight loans by 75 points to 5.50 percent and raising the rate on overnight deposits by 25 points to 0.5 percent on overnight loans to “streamline the transmission mechanism of monetary policy decisions.”
     “This measure creates conditions for maintaining inflation in the range of +/- percentage points from the medium-term inflation target of 5.0 percent,” NBM said on Aug. 6.
     NBM, which said the policy decision by its executive board was unanimous, has now cut its base rate by 250 basis points this year following two cuts in March.
     Since December 2019, when the central bank also cut its rate for the first time after raising it in July 2019, the rate has been lowered 450 points.
     In addition to the rate cuts, NBM also cut its required reserve ratio on banks’ leu and non-convertible liabilities by another 100 basis points to to 32 percent for the period of Aug. 16 to Sept. 15 and then for the period of Sept. 16 to Oct. 15.
     The reserve ratio on freely convertible currencies was raised 300 basis points to 27.0 percent for the same to application periods as on lei-denominated liabilities, the bank said, adding the decision to continue to balance the reserve ratios aims to improve financial intermediation in the domestic currency and was discussed during last month’s talks with the International Monetary Fund (IMF).
      The policy decision followed the bank’s third inflation report, which will be published on Aug. 13, which forecasts that aggregate demand will generate disinflationary pressures by the third quarter of 2021, mainly due to measures taken by the government to ease the pandemic, and the reduced budget expenditures in the first half of this year and a decrease in some regulated tariffs.
      On July 27 the IMF said its staff and Moldova had agreed on an economic reform program supported by a 3-year extended credit facility and extended fund facility agreements, allowing access to about US$558 million.
     Approval of this agreement is expected by the IMF executive board in September, subject to the country’s implementation of a number of actions in the area of central bank independence, financial sector oversight and fiscal transparency.
     “The successful clean-up of the banking sector in the aftermath of the major bank fraud is a credit to the supervisory work of the NBM,” the IMF said, adding it is in Moldova’s interest to preserve the independence of the central bank and is also a critical requirement under the latest agreement.
     In March Moldova detained two current and two former senior central bank officials on suspicion of involvement in the US$1 billion theft from three banks in 2014-2015, triggering a political crises in the former Soviet republic.
      The theft led to street protests, a freeze in aid by the IMF and the European Union, a plunge in the leu’s exchange rate and a rise in inflation.
      Inflation in Moldova, which is located between Ukraine and Romania, close to the Black Sea, rose to 4.3 percent in June from 4.1 percent in May and its gross domestic product grew 0.5 percent in the first quarter from the previous quarter for annual growth of 0.9 percent.
      After falling in the first three months of the year, the leu has been rising May and rose further today to 16.6 to the U.S. dollar, up 4.2 percent this year.
     The National Bank of Moldova issued the following statement:

“The Executive Board of the National Bank of Moldova (NBM) decided unanimously, at its meeting of 6 August 2020, a set of incentive monetary policy measures.

Thus, the base rate applied to the main short-term monetary policy operations decreased by 0.25 percentage points to 3.0 percent annually. This measure creates conditions for maintaining inflation in the range of ± 1.5 percentage points from the medium-term inflation target of 5.0 percent.

The decision is based on an assessment of the recent available macroeconomic information on internal and external environment and the assumptions taken into account in drawing up the new forecasting round.


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At the same time, the Executive Board set the interest rates at the level of 5.5 percent on overnight loans and of 0.5 percent on overnight deposits. The decrease of 1.0 percentage points in the interest rates corridor aims to calibrate monetary policy instruments in order to streamline the monetary policy transmission mechanism.

The required reserves ratio from the financial means attracted in Moldovan lei and in non-convertible currency decreased by 1.0 percentage points, up to 32.0 percent for the application periods of 16 August 2020 – 15 September 2020, and, respectively, 16 September 2020 – 15 October 2020. The required reserves ratio from the financial means attracted in freely convertible currency increased by 3.0 percentage points, up to 27.0 percent, for the same application periods. The decision to continue balancing the required reserve ratios, also discussed in last month’s talks with the IMF, aims to improve financial intermediation in the national currency.

The Inflation Report no. 3 was also approved during today’s meeting, which will be published on 13 August 2020.

According to the forecast contained in the report, the aggregate demand will generate disinflationary pressures by the third quarter of 2021, mainly due to the measures taken by the authorities to mitigate the pandemic crisis and to reduce budget expenditures in the first half of this year.

In this context, the aggregate domestic demand and the negative fiscal impulse as well as the decrease in some regulated tariffs will be the main factors with disinflationary action. At the same time, a pro-inflationary influence will have the decrease of the agricultural production in the current year, the export restrictions to some agro-food products in the region, the effect of the products with a strong seasonal character and the adjustment of excise duties.

The NBM is continuously monitoring the macroeconomic situation caused by the pandemic and, in due course, without compromising its fundamental objective of ensuring price stability, will come up with the necessary measures to maintain a sufficient liquidity level for licensed banks, in support of a sustainable and stable banking system.

The next monetary policy meeting will take place on 9 September 2020, according to the published schedule.”

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