The National Bank of Moldova (NBM), which left its rate steady at its last meeting on Aug. 25, has now cut the rate by a total of 1,000 basis points this year as it continues to unwind rate hikes totaling 1,600 points between December 2014 and August 2015 in response to a plunge in the exchange rate of the leu and accelerating inflation.
Inflation in the Republic of Moldova, located between Ukraine and Romania, declined to 3.6 percent in August from 7.0 percent in July, within the central bank's target band of 5.0 percent, plus/minus 1.5 percentage points.
The exchange rate of Moldova's leu - which fell by 16.7 percent in 2014 and 21 percent in 2015 against the U.S. dollar - has stabilized this year.
Today the leu was trading at 19.75 to the dollar, steady from 19.70 at the start of the year.
Moldova's economy is continuing to improve, with Gross Domestic Product up by an annual rate of 1.8 percent in the second quarter, up from 0.8 percent in the first quarter, and the central bank said data for July and August shows "ongoing revival of economic activity in the third quarter."
Exports in July were up by 0.5 percent from the same month last year while industrial output was down by 5.2 percent. But in August, the annual growth of goods transported jumped by 19 percent and the volume of new loans rose by 17.3 percent and new deposits by 19.9 percent from a year ago.
The National Bank of Moldova issued the following statement:
"The Executive Board of the National Bank during the meeting of 29 September 2016 adopted unanimously ruled:
1. It reduces base rate applied on the main monetary policy operations on short term by 0.5 percentage points, from 10.0 to 9.5 percent annually .
2. It reduces interest rates:
- overnight loans by 0.5 percentage points, from 13.0 up to 12.5 percent annually;
- Overnight deposits by 0.5 percentage points, from 7.0 up to 6.5 percent annually.
- overnight loans by 0.5 percentage points, from 13.0 up to 12.5 percent annually;
- Overnight deposits by 0.5 percentage points, from 7.0 up to 6.5 percent annually.
3. Maintain the required reserves from means attracted in freely convertible currency at 14.0 percent of the base.
4. Maintain the required reserves from means attracted in MDL and non-convertible currency at the level of 35.0 percent of the base.
Analysis of the most recent statistical data reveals downward dynamics of the annual inflation rate for the eighth consecutive month and its return to the target band of ± 1.5 percentage points to the inflation target of 5.0 percent.
The annual inflation rate for August 2016 reached the level of 3.6 percent which is 3.4 percentage points lower than the previous month.
Deceleration in annual inflation in August is in line with the latest forecast of the NBM (published in August 2016) and validates the correctness of monetary policy decisions in 2015 and early this year.
In August 2016 the annual rate of core inflation in January was by 1.3 percentage points lower than in the previous month and constituted 7.5 percent.
In the second quarter of 2016, economic activity recorded an increase of 1.8 percent compared to the same period of 2015. In terms of uses, this dynamic is driven by increased household final consumption and changes in inventories, generating a contribution of 1.9 percentage points and, respectively, of 4.0 percentage points. By resources, the positive evolution of GDP was driven by the increase in gross value added in all sectors, except the "construction" and "public administration". Thus it was recorded increase in gross value added in "agriculture" with 4.1 percent, "trade" by 4.1 percent, "transport and storage" by 3.1 percent, "information and communications" (7.0 percent) and "industry "(0.6 percent).
The dynamics of macroeconomic indicators in July and August 2016 shows moderate signals related to ongoing revival of economic activity in the third quarter. In July 2016, exports increased compared to the same period of 2015 by 0.5 percent and imports decreased by 7.9 percent. Meanwhile, industrial production decreased by 5.2 percent, the volume of trade in services by 5.6 percent, while the turnover for the retail trade increased by 1.2 percent. In August 2016, the annual growth rate of transported goods registered a pronounced increase to the level of 19.0 percent.
From the perspective of consumer demand, July 2016, the annual average real wage growth in the economy was 0.9 percent, 0.8 percentage points lower than in June 2016. Money transfers to individuals through banks Moldova decreased in January-August by 6.0 percent, while in the month of August 2016 increased by 18.4 percent in nominal terms compared with similar periods of 2015.
Lending and saving processes in the month of August 2016 witnessed similar developments. The volume of new loans during the reporting period increased by 17.3 percent and new attracted deposits increased by 19.9 percent compared to the same period last year. The total balance of loans at the end of August decreased by 13.7 percent from the previous year and the total balance of deposits recorded growth of 4.0 percent compared to the end of August 2015.
The average rate on new loans in national currency decreased by 0.30 percentage points from the level recorded in July 2016 constituting 13.70 percent. The rate on deposits attracted in MDL decreased by 1.62 percentage points to the level of 8.24 percent in August 2016.
The monetary policy stance continues to be configured depending on the risks and uncertainties associated with developments in the external environment and internal. External risks such disinflationary associated with reduced economic activity in the eurozone countries and the continuing recession in the Russian Federation - the main trading partners of Moldova, with repercussions on reducing short-term revenues's foreign population and domestic exporters through the channel remittances population and the foreign trade. Potential risks stemming inflation and increased volatility in international financial and currency markets, the uncertainties associated with oil prices, international prices for raw materials and food. Key risks and uncertainties are associated indigenous delaying adjustment tariffs, excise change in terms of fiscal policy stance for 2017, respectively, harvest of 2016. Thus, there is an increased prevalence of disinflationary risks and anticipated process rapid reduction in the annual rate of price growth, also because of the high base of comparison in 2015.
Assessing the outlook for short and medium term inflation, Executive Board members of the NBM, the meeting of 29 September 2016 decided unanimously to reduce the interest rate monetary policy by 0.5 percentage points, from 10.0 to 9.5 percent annually.
That decision aims to maintain inflation close to the target of 5.0 percent over the medium term, with a possible deviation of ± 1.5 percentage points. Calibration gradual monetary policy stance aims at ensuring real monetary conditions appropriate support lending and savings and boosting domestic demand , combined with adapting domestic economic environment continued volatility and uncertainty in the external environment.
BNM will continue to adequately manage excess liquidity through sterilization operations as scheduled.
Meanwhile, the National Bank will propose further liquidity to banks, as scheduled for 2016 through repo operations within 14 days, fixed rate equal to National Bank base rate plus a margin of 0.25 percentage points.
We reiterate that BNM will monitor and anticipate further developments in domestic and global economic developments so that, through specific flexibility operational framework of inflation targeting strategy to ensure price stability over the medium term.
The next meeting of the Executive Committee of the National Bank on monetary policy will take place on 27 October 2016 as scheduled."
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