Moldova’s central bank, the National Bank of Moldova (BNM), made the second deep 3 percentage point (pp) rate cut this year on March 20, bringing the refinancing rate down to 14% from 20% within a couple of months.
Consumer price inflation dropped from nearly 35% y/y in October to under 25% y/y in February and the BNM expects it to drop down to 6.6% by the end of the year.
February inflation was 1pp above the BNM’s expectations, which, however, did not prevent the second aggressive rate cut, mainly because the deviation was explained by administrated prices as opposed to CORE inflation.
The rapid interest rate adjustment took place amid the background of disappointing Q4 GDP figures: the country’s economy faces a double-digit contraction for the second consecutive quarter.
A major underlying factor for both inflation and the economic contraction is the domestic demand that has particularly weakened. Both private consumption and the aggregated wages in the country contracted by over 10% y/y in Q4.
Subdued demand will remain a significant driver for inflation in the coming quarters, but will not be the only one. The BNM cited sluggish external demand, base effects and moderate energy prices globally among other drivers.
The last two rate cuts had an asymmetric impact on the interest rates in Moldova – deposit interest rates decreased, as expected, but loan interest rates increased marginally.
The weighted average rate on deposits was 11.1% in February 2023, 1.94pp less compared to January 2023, while the average loan interest rate was 14.34%, 0.08pp more compared to January.