National Bank of Moldova relaxes monetary policy

Chisinau, 27 May /MOLDPRES/- Economic commentary by MOLDPRES News Agency

The executive committee of the National Bank of Moldova (BNM) decreased the basic rate applied to the main monetary policy operations for short term from 15.0 to 13.0 per cent annually.

It is the fourth time this year when BNM reduces the basic rate, against a background of a sensible decrease in the inflation rate. The rate fell from 19.0 per cent to 13.0 per cent, and clients have to wait for a while before the banks react and, for their part, cheapen credits. The central bank’s decisions to reduce the monetary policy interest, expected by everybody, will be reflected initially in the treasury yields and the cost at which the banks borrow each other on the interbank market, and the economic agents and the residents will feel a bit later the effect of these decisions when they are going to borrow money from financial institutions.

In 2015, when BNM tightened the monetary policy from month to month, in an attempt to decrease the pace of inflation's increase, and the basic rate grew from 6.5 per cent in late December 2014 to 19.5 per cent in September 2015, the state securities market (HVS) exploded. In only three months, the interest rate at HVS with the payment date of up to one year increased from 11.81 per cent in January 2015 to 20.20 per cent in March 2015, and grew to 26.48 per cent in last January. As a result, the domestic state debt increased by almost 1 billion lei in the first quarter of 2016, which would mean a 10-million lei daily growth.

The decisions by the executive committee were reflected more slowly in the cost of bank funding. Although the rate tripled, the credits became dearer more slowly. The interest rate increased on the average from 11.60 in January 2015 to 16.08 per cent in the first month of 2016. A relatively stronger increase occurred in consumer credits borrowed by private people, which, in fact, entail risk for banks.

The tightening of the monetary policy and respectively, increase in loans' interest rates, led to a decrease in demand for them both on behalf of economic agents and the residents, who started less and less borrowing from banks. It is true that a factor which discouraged the demand for loans was and remains to be the crisis affecting more fields, first o all, the exports and imports.

Starting from February 2016, when it became clear that the prices were dropping, BNM began to strongly relax the monetary policy. A few months later, the National Bank of Moldova revised downwards the inflation forecast for 2016, at 7.0 per cent against 10.1 per cent in February. This is the most sensible forecast revision of the last years. The annual inflation rate will get back to the target variation interval of 5 per cent in the third quarter of 2016, one year earlier than previously forecasts.

As a result, real prerequisites appeared for a further cut in the the basic rate and we can expect a return of the basic rate below 10 per cent as early as on the months to come.

How did the market and banks’ clients react to BNM’s decisions to reduce the monetary policy interest? After the shock experienced by the economic agents and the residents in 2015, they seem to be cautious, they are not rushing to borrow money, and the banks reduced the credits’ costs insignificantly. The volume of new credits provided in last April decreased by 22.5 per cent, although the new deposits grew by 18.1 per cent against the similar period of 2015, according to BNM data.

The average interest rate on the credits for the economic agents decreased from 15.95 per cent in January 2016 to 15.51 per cent in April.

The loans even became dearer insignificantly on average in the banking system in April against the month before. And this in conditions when BNM significantly reduced the basic rate. There is still some uncertainty, triggered by the economic situation, as well as by the prudence proved by those who give loans and those who borrow them.

The trend, however, is downward and the relaxing of the monetary policy by BNM represent a signal in this respect.

(Reporter V. Bercu, editor L. Alcaza)