The NBM increased the inflation forecast for this year and believes that the annual rate of inflation will reach a maximum in the current third quarter.
This is stated in the materials of the National Bank of Moldova (NBM) regarding the decision taken the day before by the Executive Committee of the NBM to increase the base rate applied to main short-term monetary policy operations by another 3 p.p. - from 18.5% to 21.5% per annum, as well as to approve for publication the next Inflation Report, which will be presented next week. As noted by the NBM, the annual inflation rate increased from 22.2% in March to 31.8% in June. The acceleration in prices was due to rising international and regional food and energy quotations, which led to higher prices in the domestic market for both goods and services. Adjustments in gas, heating and electricity tariffs, rising fuel prices, as well as progressive wage dynamics increased the costs of economic agents, which gradually affected prices. The war in Ukraine put additional pressure on food, fuel prices and some components of core inflation. The depreciation of the MDL against the USD created additional inflationary pressure. Demand-side pressures eased, with little impact on food prices and components of core inflation. As the NBM notes, at the same time, the situation in the global economy continues to deteriorate. Rising international quotations, tightening of monetary policy, increasing production costs, growing COVID-19 cases and resumption of quarantine in China are restraining the global economic activity. An aggressive increase in the Federal Reserve's interest rate range in June, along with increased risk premiums, contributed to a significant strengthening of the USD. The EUR depreciated to parity with the USD in July due to interest rate differentials and government bonds. The natural gas crisis in Europe escalated at the end of June, when the gas price reached $1900 per 1,000 cubic meters. International agri-food prices have declined slightly in recent months as a result of expectations of better harvests in the Northern Hemisphere and improved grain conditions for some major producers. Economic activity slowed sharply at the beginning of the current year, and annual real GDP growth was 1.1% in the first quarter of 2022. Several indicators available from April through June point to conditions of lower economic activity in the second quarter of 2022 as well. Regarding monetary conditions, the NBM notes that excess liquidity in Moldova's banking sector amounted to 4.6 billion lei, up by 0.1 billion lei in the second quarter of 2022, compared to the previous quarter. The annual growth of monetary aggregates decreased in Q2 2022, compared to the previous quarter, mainly due to money in circulation and deposits in the national currency. Interest rates on credit balances in the national currency increased by 0.64 p.p. compared to the previous quarter, and interest rates on deposits increased by 0.97 p.p. compared to the previous quarter. Interest rates on loans and deposits in foreign currency have not changed significantly. As noted by the National Bank, for the forecast there were used external hypotheses regarding the strengthening or maintaining of pro-inflationary pressure from international quotations, restraining external demand, maintaining euro parity against the USD, and the RUB will reflect domestic monetary transactions in the absence of capital account transactions. It is assumed that consumer prices will rise sharply in the coming period as well, given the rise in external prices for food and energy, the war in Ukraine, the need to adjust tariffs for the supply of natural gas and related services with their side effects, indexation of pensions and wage increases. The NBM emphasizes that the annual inflation rate will peak in the current Q3 and then decline, returning to the fluctuation range at the end of the forecast horizon, in Q2 2024. Aggregate demand will be negative throughout the forecast period due to deteriorating external demand and household consumption financing, but will be supported by sustained positive fiscal stimulus and, to a small extent, monetary conditions. The National Bank said that the inflation forecast for Moldova was raised until the beginning of the next year and mostly lowered until the end of the comparable period. For components, the forecast for food and fuel prices has been raised and core inflation has been lowered; for regulated prices, it has been raised until the first half of 2023, and then it is envisaged that they will be lowered. The outlook is characterized by increased uncertainty amid tightening monetary policy in major economies, slowing demand in China and other major economies, the energy crisis in Europe, the war in Ukraine, limited supply of raw materials, and deteriorating agrometeorological conditions in Europe. Major domestic uncertainties include tariff adjustments, weather conditions, the flow of refugees, disruptions in foreign trade, and an increase in COVID-19 cases. // 05.08.2022 – InfoMarket
