Moldova's central bank raised its benchmark base rate by 200 basis points to 17.50 percent, saying it expects inflation to accelerate in coming quarters to above the upper limit of its inflation target as the depreciation of the leu will raise the prices of imported goods and services and due to the comparison with last year's lower base.
The National Bank of Moldova (NBM), which has now raised its rate by 11 percentage points this year, added that it expects the negative output gap in the economy to continue over the next eight quarters due to weak domestic demand, which will reduce future inflationary pressures.
The central bank's council approved the latest inflation report, which will be presented on Aug. 6, that raised the forecast for average inflation in 2015 by 1.2 percentage points to 9.3 percent and the 2016 forecast by 5.2 points to 11.6 percent compared with the May forecast.
The central bank, which targets inflation at a midpoint of 5.0 percent, within a range of 3.5 to 6.5 percent, said it expects inflation to return to its target range in the second quarter of 2017.
In addition to raising its base rate, NBM also raised the rate on overnight loans by 200 basis points to 20.5 percent and the rate on overnight deposits to 14.50 percent from 12.50 percent.
In order to sterilize some of the excess liquidity and improve the transmission of the policy decisions, the central bank also raised the required reserves for leu and non-convertible deposits by 600 basis points to 32.0 percent for the period Sept. 8 through Oct. 7. Reserves on freely convertible currencies was maintained at 14.0 percent.
Moldova's inflation rate rose to 8.3 percent in June from 8.1 percent in May for the highest rate since November 2011, mainly due to higher core inflation and food prices.
The Moldavian leu has been depreciating since July 2014 and hit a low of 4.2 to the U.S. dollar in mid-March. Since then it has appreciated, trading at 4.0 today but still down 7.5 percent this year.
NBM said its policy stance was still affected by a complexity of risks, with the emphasis on inflationary risks. Weak economic activity in the euro area and recession in Russia - its main trading partners - affects the foreign income of households and domestic exporters.
"The escalation of geopolitical tension in the region could cause additional inflationary pressures," the NBM said.
Moldova is a former Soviet state that is located between Romania to the west and Ukraine to the north, south and ease.
Exports and imports in the first two months of the year fell by 18.3 and 25.0 percent, respectively, from the same period last year while industrial production was up by 1.8 percent, NBM said.