The NBM reduced the base rate applied to the main short-term monetary policy operations by 0.5 p.p. - from 4.75% to 4.25% per annum.
This decision was made by the NBM Executive Committee at a meeting on February 6. The National Bank also reduced interest rates on loans and overnight deposits by 0.5% - from 6.75% to 6.25% and from 2.75% to 2.25% per annum. The required reserve ratio applied to funds raised in Moldovan lei and non-convertible currencies was maintained at 33% of the calculation base, and the required reserve ratio applied to funds raised in freely convertible currencies was left at 43% of the calculation base. The NBM Executive Committee also approved today the Inflation Report for February 2024, which will be published on February 13. As noted in the materials of the NBM, in December 2023, inflation in Moldova was within the target range for the 3rd month in a row. Thus, today’s decision of the NBM helps to consolidate these indicators, further stimulate aggregate demand, currently disinflationary, including by stimulating consumption, balancing the national economy and consolidating inflation expectations. The NBM closely monitors the inflation process, assessing the risks and uncertainties associated with it, and future decisions of the Executive Board will be aimed at maintaining inflation within ±1.5 percentage points from the target of 5%. The National Bank emphasizes that the current forecast generally confirms previously predicted trends. Thus, annual inflation fell to 4.2% in December 2023, or by 4.4 percentage points, compared to September, which is slightly lower than expected. The slight deviation is mainly caused by an unexpected reduction in the electricity tariff in November and the statistical reflection of compensation provided to the population for energy resources during the cold period of the year. The restrictive monetary policy measures adopted by the NBM at the right time, from the summer of 2021 to the end of 2022, together with the strengthening of the leu and the decline in regional energy and food prices, made a significant contribution to the decline in inflation. Regarding the external environment, the NBM notes that at the beginning of 2024 the world economy developed fragmentarily. The US economy is in a better position than the eurozone, where fiscal consolidation poses a risk to the recovery in economic activity. China's housing crisis is taking a serious turn, which will have implications for the stock and corporate bond markets. The wars in Ukraine and Palestine continue. Attacks by Yemeni rebels on shipping in the Red Sea, as well as retaliatory measures by the United States and its allies, have disrupted shipping through the Suez Canal. Traders are forced to go around Africa, so logistics and transport costs have increased. In advanced economies, annual inflation has fallen to targets set by central banks, but monetary authorities are in no hurry to cut interest rates due to pronounced risks and uncertainty. High interest rates and structural changes in global trade in recent years are holding back economic growth. In Moldova, economic activity in the third quarter of 2023 increased by 2.6% compared to the same period of the previous year. This growth was largely due to a good harvest, which led to an increase in exports and a decrease in imports of agri-food products. Consumption and investment fell due to modest growth in real incomes and high uncertainty in the region. Thus, domestic demand remains weak. On the supply side, the financial sector, communications, social services, construction and real estate operations developed positively, while a decline was noted in industry, trade, and transport. According to live data published by the NBS for November 2023, economic activity is showing mixed trends. Exports and retail trade grew in nominal terms by 6.7% and 2.3%, respectively. Imports, industrial production, and wholesale trade decreased by 14.7%, 6.1% and 3.5%, respectively. In terms of sources of financing consumption, transfers to individuals decreased by 12.8% in annual terms. Regarding monetary conditions, the NBM indicates that excess liquidity in the banking sector amounted to 9.4 billion lei, decreasing in the fourth quarter of 2023 by 0.6 billion lei compared to the previous quarter. The annual growth of the M3 money supply in the fourth quarter of 2023 amounted to 18.3%, mainly due to deposits in lei. Interest rates on new loans and deposits in national currency continued to decline in the fourth quarter of 2023, including as a result of the implementation of cumulative measures of stimulating monetary policy. Thus, the weighted average rates on loans amounted to 10.5%, and on deposits - 4.23%, decreasing compared to the fourth quarter of 2022 by 3.64 percentage points and 9 p.p., respectively. Regarding the inflation forecast, the National Bank expects that external demand will be weak and external inflation will decrease to the targets set by central banks. Monetary policy rates will be reduced more slowly than expected. The US dollar will depreciate slightly as its attractiveness fades amid lower interest rates and the ongoing debate over the debt ceiling. Consumer demand in China and Europe, as well as tensions in the Middle East, pose the biggest risks to oil prices. Natural gas prices will be relatively stable, while food prices will rise slightly. In Moldova, the annual inflation rate will fluctuate slightly around the target of 5% (±1.5 percentage points) in the next 8 quarters. The dynamics will largely depend on all the components. Aggregate demand will be deflationary throughout the forecast period due to weak external demand, reduced consumption finance and tight monetary conditions. A good harvest in 2023 and positive fiscal stimulus starting in Q2 2025 will soften the decline in aggregate demand. Average annual inflation will be about 4.7% this year and 4.5% next year. The trends expected in previous rounds generally remain in effect. The inflation forecast was slightly lowered for the first quarter of 2024 and raised for the remainder of the comparable period. Forecasts for core inflation and regulated prices were raised, mainly due to an increase in excise taxes and, accordingly, a revaluation of the effect of reflecting compensation provided to the population for energy resources during the cold period of the year. Forecasts for food and fuel prices were lowered. Forward-looking risks and uncertainties remain high. From the external environment, the NBM identifies the following sources: tension in the Middle East, the duration of the blockade of Red Sea transport routes, the war in Ukraine, temporary supply shocks, food prices, the continuing decline in economic activity in the euro area, the beginning of easing monetary policy measures in the region and the world, as well as the possible geopolitical alignment after the 2024 elections, which could lead to changes in economic policy. Among the main internal uncertainties are tariff adjustments, changes in shares in the consumer price index basket, how compensation for energy resources provided to the population during the cold season is reflected in statistics, the flow of refugees, weather conditions and the future harvest. The inflation report for February 2024, containing an analysis of the domestic and foreign economic situation and the medium-term inflation forecast, will be presented by the President of the NBM and published on the bank’s official website on February 13. The next meeting of the NBM Executive Committee on promoting monetary policy will take place on March 21, according to the approved calendar. It should be noted that the last time the NBM Executive Committee changed the base rate applied to the main short-term monetary policy operations was at its meeting on November 7, 2023, reducing it from 6% to 4.75% per annum.// 06.02.2024 — InfoMarket
