Moldova's central bank raised its base rate by a sharp 500 basis points to 13.50 percent in what the bank described as a "preventative response" to "imminent inflationary pressures" from the increased depreciation of the leu currency since the beginning of this year.
The National Bank of Moldova, which took the decision at an extraordinary board meeting, has raised its rate by 10 percentage points since Dec. 11, 2014 in response to a fall in the value of the leu against the U.S. dollar and the euro that it expects will boost inflation to above its upper limit.
The central bank, which targets inflation of 5.0 percent, plus/minus 1.5 percentage points, added that the rate on its overnight loans would also be raised to 16.5 percent from 11.5 percent while the overnight deposit rate would be increased to 10.5 percent from 5.5 percent.
Moldova's inflation rate was stable at 4.7 percent in January from December but the leu fell by 19 percent against the dollar in 2014 and was trading at 18.45 to the dollar today, down 15.6 percent this year. Since the start of 2014 the leu has lost 30 percent of its value against the dollar.
Landlocked Moldova, a former Soviet state, is located between Romania to the east and Ukraine to the north, south and east.
The country's currency has been hit by a shortage due to restrictions on exports from Moldova to Russia and an annual 30.8 percent fall in money transfers from abroad in December.
The central bank added that nervousness in the foreign exchange market has been fueled by the central bank's decision to establish a special savings bank, which has triggered negative expectations about the future of the leu's exchange rate and inflation.
On Monday Dorin Dragutanu, central bank governor, told Reuters that the central bank had spent $210 million, or close to 10 percent of its foreign currency reserves, to defend the leu since the start of this year.