The NBM reduced the base rate applied to the main short-term monetary policy operations by another 4 percentage points - from 10% to 6% per annum.
This decision was made by the Executive Committee of the NBM at a meeting on June 20. In addition, also by 4 p.p. were reduced interest rates on loans and overnight deposits - from 12% to 8% and from 8% to 4% per annum, respectively. At the same time, the required reserve ratio from funds raised in Moldovan lei and non-convertible currency was kept at the current level - 34% of the calculation base, and the required reserve ratio from funds raised in freely convertible currency was also kept at the current level - 45% of the settlement base. According to the NBM, the current monetary policy decision continues a number of stimulating measures taken by the National Bank in the recent period and is aimed at creating the necessary monetary conditions for inflation to return to the fluctuation range of ±1.5 percentage points from the target inflation rate of 5% and maintain it at this level in the medium term. This decision of the National Bank is due to the confirmation of the assumptions and conclusions considered in the April 2023 forecast, and the downward trend in the annual inflation rate under the influence of pronounced disinflationary pressure from domestic and external demand. The decision of the NBM is aimed at maintaining the balance of the national economy by creating monetary conditions for revitalizing lending in the context of reducing associated costs, revitalizing consumption, thereby contributing to an increase in aggregate demand. According to the NBM, thus, the new macroeconomic information released after the completion of the previous round of forecasting by the National Bank confirms the correctness of its inflation forecast, developed and presented in the Inflation Review for May 2023. The NBM stressed that the annual inflation rate in May 2023 continued to decline, amounting to 16.3% and exceeding the expected level by 0.6 percentage points. The deviation of actual inflation from the forecast was mainly due to the positive impact of regulated prices and food prices, which increased by 46.1% and 14%, respectively, in annual terms, which is 2.3 p.p. and 0.9 p.p. above the levels forecast in the Inflation Review in May 2023. The dynamics of regulated prices was driven by higher prices for air passenger transportation associated with international flights and reflecting a partial effect of electricity tariff adjustments from April 2023, the increase in food prices was caused by more pronounced dynamics of volatile prices. According to the National Bank, the gradual disappearance of spillovers associated with gas and electricity tariffs from previous periods, along with the persistence of disinflationary aggregate demand and the appreciation of the exchange rate, softened the pressure of core inflation. Herewith, core inflation and fuel prices in May 2023 turned out to be 0.1 p.p. and 0.6 percentage points below the forecast, amounting to 10.5% and -3.4%, respectively, year on year. Fuel prices were supported by lower-than-expected oil prices and a stronger exchange rate. Although annual inflation between April and May 2023 was marginally higher than forecast, the earlier-than-expected cut in the natural gas tariff, along with more modest oil price performance, outlines a similar annual inflation trajectory for 2Q23 to forecast in the May 2023 Inflation Review. The NBM stresses that global economic conditions remain under pressure from subdued demand, along with looming risks and uncertainties associated with the war in Ukraine. In terms of moderate global demand, there is a decline in international quotations associated with oil, food products and raw materials. Against this background, global inflation, however, is slowing down, remaining at a level well above pre-pandemic levels. Regarding economic activity, the National Bank noted that the Moldovan economy continued to show negative growth rates in the first quarter of 2023, but slower compared to the last two quarters of the previous year. Thus, GDP contracted by 2.4% in real terms in Q1 2023 compared to the same period of the previous year, which led to disinflationary pressure from aggregate demand during this period. The evolution of economic activity growth was supported by the dynamics of household consumption, which reversed its downward trend, falling by 2.6% against the backdrop of a reduction in real terms of household disposable income while maintaining restrictive lending conditions. Gross fixed capital formation (-0.4%), along with net exports of goods and services, had a negative impact on GDP dynamics. Herewith, the decline in economic activity was due to negative developments in industry, trade and construction. Gross value added in agriculture decreased by 4% in 1Q 2023. In terms of sources of financing consumption, the NBM notes that the wage bill in real terms decreased by about 3.9% in 1Q 2023, compared with the same period of the previous year. On the other hand, money transfers in March 2023 maintained a positive trend compared to the first 2 months of this year, having increased by 15.3%. The National Bank points out that the gradual stimulating conduct of monetary policy through the interest rate channel, which began at the end of last year, together with the situation in the money market, led to a decrease in interest rates on new loans issued and new deposits attracted in the national currency in February -May 2023. Thus, the weighted average interest rate on new loans issued in Moldovan lei decreased in May by 0.27 percentage points, to 13.36% per annum, and on new term deposits attracted in Moldovan lei, fixed the level of 8.36%, which is 0.19 p.p. below April. The dynamics of rates favored the dynamics of the volume of new loans issued in Moldovan lei, which increased by 9.3% in May compared to the previous month. The NBM says that, having identified and assessed the risks of deviation from the inflation forecast developed in April 2023, one can note a trend towards a stronger appreciation of the leu, lower domestic demand, as well as lower prices for imports of natural gas and oil on the international market. In this context, the evolution of the medium-term inflation forecast was assessed as slightly downward over the forecast horizon. At the same time, the expectation of a slightly higher global food price forecast starting in 2024 softened the slight negative deviation. The tense situation in the region and potential escalation, the volatility of energy prices at the regional level, the way utility tariffs are adjusted, remain uncertain about inflation forecasts in the short and medium term. Uncertainty with agricultural production of the current and next year also remains relevant. The next meeting of the Executive Committee of the NBM on the promotion of monetary policy will be held on August 9, 2023. As InfoMarket reported earlier, at its last meeting on monetary policy on May 11, the NBM reduced the base rate applied to the main short-term monetary policy operations by 4 p.p. - from 14% to 10% per annum. On March 20, the NBM reduced the base rate applied to the main short-term monetary policy operations by 3 percentage points - from 17% to 14% per annum. Before that, on February 7, the NBM reduced the base rate applied to the main short-term monetary policy operations by 3 percentage points - from 20% to 17% per annum. It is noteworthy that before that, the NBM reduced the base rate applied to the main short-term monetary policy operations only on December 5, 2022, reducing it by 1.5 p.p. - from 21.5% to 20% per annum. Prior to that, it had not decreased for 2 years, from November 6, 2020, when it was reduced from 2.75% to 2.65% per annum. Since then, until December 5, 2022, it has only increased, reaching a level of 21.5% in August 2022. // 20.06.2023 — InfoMarket
