The NBM kept the base rate applied to the main short-term monetary policy operations at the same level of 21.5% per annum.
In addition, interest rates on loans and overnight deposits also remained at the same level - 23.5% and 19.5% per annum, respectively. This decision was taken by the Executive Committee of the National Bank of Moldova at a meeting on November 8, aimed at slowing down consumer prices by mitigating spillovers from supply shocks, further supporting financial intermediation in the national currency and savings against consumption, balancing the trade balance, and also by anchoring inflationary expectations. As mentioned by the NBM, according to the forecast, annual inflation in the fourth quarter of 2022 will reach its maximum level and change its trajectory, and will decrease in the subsequent forecast period. The National Bank drew attention to the fact that in the context of a change in the direction of inflation, the implementation of monetary policy will require careful adaptation to national and world realities in order to create appropriate conditions for achieving the fundamental goal of the NBM. Taking into account the presence of large risks and uncertainties, when the balance of risks will shift towards disinflationary ones, the NBM will pursue an expansionary monetary policy that will ensure the return and maintenance of inflation close to the target. Regarding the evolution of inflation, the NBM recalled that the annual inflation rate rose to 34% in September 2022 (by 2.2 percentage points compared to June this year). Among the factors of this growth are the growth of international quotations for energy resources, the hydrological drought affecting domestic prices for food products, the adjustment of tariffs and, in these conditions, the increase in costs. The depreciation of the leu against the US dollar created additional pressure. The war in Ukraine has significantly increased the influence of the above factors.Demand pressures that persisted last year eased and had little impact on core inflation and food prices. The NBM stressed that the global economy has slowed down sharply in the face of increased uncertainty. The war and the ongoing economic crisis lead to a drop in demand and a simultaneous rise in prices. Long-term high prices for raw materials, especially for energy, reduce savings, investment and the purchasing power of the population. The tightening of monetary policy in order to return inflation to the level of established targets causes a slowdown in aggregate demand. OPEC+'s decision to cut total supplies by 2 million barrels per day to stem the fall in the price of oil shows how energy supplies reflect the priority of geopolitical interests at the expense of the economic balance during this period. The price of gas in Europe is significantly higher than the highs of recent years due to the cessation of supplies from Russia. The appreciation of the US dollar against the background of the depreciation of the euro and the pound sterling at record levels represents structurally different international financial markets. The euro remains below parity against the US dollar due to the energy crisis in Europe and significant differences between monetary policy rates. The National Bank emphasizes that economic activity in our country slowed down in the first half of this year, while the annual rate of real GDP decreased by 0.9% in the second quarter of 2022. The moderation of economic activity was determined by a decrease in domestic demand, increased uncertainty in the region and a small harvest against the backdrop of unfavorable agrometeorological conditions. On the demand side, exports, national consumption, and imports increased, while investment and household consumption declined. On the supply side, the trade, finance, health and social care sectors developed positively, while the agricultural, industrial and construction sectors showed a decline. A number of indicators for July-August 2022 indicate conditions for a decline in economic activity in the third quarter of 2022. The NBM reported that excess liquidity in the banking sector amounted to 4.3 billion lei, decreasing by 0.3 billion lei in the third quarter of 2022 year, compared to the previous quarter. The annual growth of monetary aggregates decreased in Q3 2022 compared to the previous quarter, mainly due to money in circulation. Interest rates on credit balances in the national currency increased by 1.95 percentage points compared to the previous quarter, for deposits - by 2.58 p.p. Interest rates on loans and deposits in foreign currency did not change significantly. The downturn in the global economy and limited supply caused by rising geopolitical risks are forecast to weigh on commodity prices. Consumer prices will continue to rise, at least due to this year's crop cuts, rising external energy prices, the war in Ukraine, natural gas and related service tariff adjustments (with their side effects), pension indexation and wage increases. The annual inflation rate will decrease until the end of the forecast horizon and will return to the fluctuation range in Q2 of 2024 . This dynamics will be determined by all inflation components. Aggregate demand will remain negative throughout the forecast period due to worsening external demand and household consumption financing, as well as tight monetary conditions, but will be supported by positive fiscal stimulus. According to the NBM, the trends expected in previous rounds generally remain in force. The inflation forecast was lowered for the first two quarters of the forecast and raised mainly for the remainder of the comparable period. By component, food and fuel price forecasts are lowered, while core inflation and managed price forecasts are raised. The National Bank draws attention to the fact that the risks and uncertainties of the forecast are high. From the external environment, such risks emerge as a reduction in supply and high prices for energy resources and other raw materials, a war in Ukraine, and a decrease in global demand. The likelihood of a sovereign debt crisis with the transition to financial markets remains high. The current runaway inflation will raise both interest rates to finance government deficits and interest rates to service debt, which have been massively increased to stem the economic downturn caused by the COVID-19 pandemic. Among the main internal uncertainties are the availability of the necessary energy resources and their price, tariff adjustments, the flow of refugees, meteorological conditions. It should be noted that at the previous meeting on September 13, the NBM Executive Committee also kept the base rate applied to the main short-term monetary policy operations at the same level of 21.5% per annum, and before that, on August 4, it increased it by 3 percentage points - from 18.5% to 21.5% per annum. Also by 3 p.p. were then increased interest rates on loans and overnight deposits - from 20.5% to 23.5% and, accordingly, from 16.5% to 19.5% per annum. Prior to this, on June 3, the NBM increased the refinancing rate also by 3 percentage points - from 15.5% to 18.5% per annum, and on May 5 - from 12.5% to 15.5%. From March 16, the base rate applied to the main short-term monetary policy operations was increased by 2 percentage points - from 10.5% to 12.5% per annum, from February 15 - from 8.5% to 10.5%, and on January 13 - from 6.5% to 8.5%. // 08.11.2022 - InfoMarket
