The National Bank of Moldova needs to gradually reduce the NBM inflation target from the current level of 5% (±1.5 p.p.) to 4% (±1 p.p.) in 2025, 3.8% (±1 p.p.) p.) in 2026 and 3.5% (±1 p.p.) in 2027 - Expert-Grup.
This opinion was expressed by the executive director of the Independent Analytical Center, Adrian Lupusor, in his commentary, in which he briefly outlined the main arguments in favor of reducing the inflation target of the National Bank of Moldova in order to align it with the new macroeconomic realities. According to the executive director of Expert-Grup, this will allow for a more effective monetary policy to ensure and maintain price stability, better convergence with EU norms in the context of the European integration process of Moldova, as well as reduce the burden on the state budget associated with servicing the public debt resulting from the “theft” of a billion." Adrian Lupusor recalled that since 2013, the National Bank has been implementing a direct inflation targeting regime: maintaining it at the level of 5% per year with a possible deviation of ±1.5 percentage points, which is considered the optimal level for sustainable economic growth and development of Moldova in the medium term. The logic is that monetary authorities have a clear, measurable goal, they influence it with the help of monetary instruments and make a direct contribution to improving the welfare of the population. However, as the executive director of Expert-Grup noted, the target of 5% (±1.5 percentage points), set at the end of 2012, does not seem to reflect today's realities and, in particular, medium-term forecasts. According to him, a simple analysis of inflation dynamics in recent years indicates a slowdown in the average inflation rate. As Adrian Lupusor emphasized, if we exclude non-monetary inflation shocks caused by the banking crisis in 2015-2016 and the energy crisis in 2021-2022, inflation exceeded the NBM target level of 5% only in about 1/3 of the months in 2013-2023. These negative dynamics also correlate with the gradual erosion of economic growth potential in recent years. Thus, against the backdrop of emigration of the working-age population and demographic aging, combined with low investment attractiveness, exacerbated by the war in Ukraine, as well as a reduction in remittances, economic dynamics, like inflation, are gradually slowing down. This decline in economic growth potential, as well as the slowdown in growth rates in a number of economic sectors, also indicates a weakening of demand-side inflationary pressures that will characterize the macroeconomic outlook in the coming years. Inflation and GDP growth rates will be significantly lower than in previous years: the consumer price index, according to NBM forecasts, will remain below the target level of 5%, and real GDP growth will be around 3-4% (obviously, in the absence of exogenous shocks). The analyst emphasized that an inflation target that is not adjusted to macroeconomic realities could undermine the main goal of the NBM - ensuring and maintaining price stability. Thus, if the National Bank continues to target inflation at 5%, while in the medium term inflation tends to decrease (medium term trend), monetary policy, instead of minimizing inflation pressure, may spur inflation. “For example, if inflation has fallen to 4% and is not forecasted to rise, the National Bank may adopt an expansionary monetary policy to raise inflation to the current target level of 5%, although in reality the policy should be more conservative to prevent a possible inflationary process. Thus, a discrepancy between the officially adopted inflation target and the actual inflation trend may serve as the wrong signal to the National Bank and, therefore, undermine its ability to prevent and mitigate inflation trends,” said the Executive Director of Expert-Grup. Adrian Lupusor recommended that the National Bank gradually reduce the NBM inflation target to 4% (±1 p.p.) in 2025, 3.8% (±1 p.p.) in 2026 and 3.5% (±1 p.p.). pp) in 2027, which will allow a smooth transition to the new target without disrupting the functioning of the financial market and the economy as a whole, and will confirm the National Bank’s strong commitment to its main goal - ensuring and maintaining price stability. As noted, the National Bank of Romania followed a similar approach, gradually reducing the target inflation rate from 7.5% (±1 percentage points) in 2005 to 5% (±1 percentage points) in 2006, then to 4 % (±1 p.p.) in 2007, to 3.8% (±1 p.p.) in 2008, to 3.5% (±1 p.p.) in 2009, to 3% (±1 p.p.) in 2011, and since 2013 it has stabilized at 2.5%. As the analyst noted, in addition, lowering the inflation target will bring Moldova closer to the EU convergence criteria, given that the vast majority of EU central banks, including the European Central Bank, adhere to the inflation target of 2%. According to him, the reduction in the target inflation rate will also be accompanied by an important bonus - a reduction of approximately 150-200 million lei per year in the interest paid by the government to the NBM as a result of the execution of state guarantees in the context of the “theft of a billion” in 2016. When the three banks that received emergency loans from the NBM and guaranteed by the state went bankrupt, the government was obliged by law to automatically cover these amounts from the state budget. To reduce the burden on the state budget, this amount (more than 13.3 billion lei) was converted into the government's public debt to the NBM with a payment schedule for 25 years at an interest rate close to the inflation target of 5%. According to the latest information from the NBM, as of October 31, 2023, this debt amounted to 11.7 billion lei, and the average interest rate was 5.3%. “A simple calculation shows that reducing the interest rate to 3.5% as a result of bringing the inflation target in line with the new macroeconomic realities will reduce debt servicing costs by about 150-200 million lei per year,” emphasized the executive director of Expert-Grup. // 15.01.2024 — InfoMarket.
