administrative council of the National Bank of Moldova decided to gradually
increase the rate of required reserves maintained by the banks up to 22 %.
Do you think that the increase by six percentage points is sufficient to
tame the explosive growth of inflation that has already reached 16.2%?
It is our opinion that any increase of required reserves maintained by the
banks contributes to taming the inflation. But talking about such specific
administrative measure one needs to see the whole picture in ensemble. One
of the big problems encountered by the Republic of Moldova in general and by
the monetary authorities in particular is lack of sufficiently strong link
between the interest rate and inflation, i.e. the so-called transmission
mechanism. These transmission mechanisms are extremely weak. One of the main
reasons explaining weakness of these links lies with excess liquidity in the
Hence, the question on how much should the required reserves be increased
in order to stop the inflation is an empirical one as the excess liquidity
should be analyzed at any level and compared to the level of required
reserves. In order to improve this mechanism of transmission and to make it
more efficient in contending the inflation it is necessary to mop up the
excess liquidity. Increasing the norm of required reserves is one of the
instruments capable of moping up the excess liquidity.
Yet another measure is the one realized by the Government last year and
that is transfer of treasury accounts to the National Bank.
All these measures are targeted towards improvement of the transmission
mechanism so that the National Bank is better equipped to contend with
inflation. The problem is that increase of required reserves will affect to
a certain extent certain banks. Some of the banks have more liquidity as
compared to others, which means that in case of higher rate of required
reserves these will encounter certain problems. Other banks will have to
either increase interest rates on deposits or search for other options for
attracting resources. Probably, the key mechanism used for the purpose will
be transactions in non-banking market. So far there is not too much activity
in the interbanking market.
Comparison with the states that have recently became members of the European
Union shows that the situation in Moldova differs in the most serious way.
As I have already mentioned, one of the key problems is the excess of
liquidity in the banking system and Moldova is not the only country facing
this problem. For example, in Romania the norm of required reserves
maintained in Romanian lei is 20 %, while for the foreign currency reserve
is amounts to 40 %. For a number of years they had to fight with the same
problem that we are facing at the moment while making attempts to resolve it
through an increase of required reserves. Analysis of what has happened
shows that this was a rather useful mechanism in moping up excess liquidity
in the market and by so doing they improved the transmission mechanism,
which in its turn was used in fighting with inflation. As a result, the
inflation dropped down considerably in a very short term.
Increase of required reserves is a monetary instrument. In the
following months there will be strong inflationary pressure generated by
further raise of prices on natural gas, electricity and food. Given these
conditions, to what extent increase of required reserves could be considered
as efficient measure?
The practice shows that the best way of countering inflation is through
application of monetary instruments, especially in situation in which the
Republic of Moldova finds itself at the moment when there is an increase of
prices on certain components of the consumer basket.
Let us imagine a consumer basket with certain set of products and, for
example, price on fuel, which went up considerably as compared to other
prices. If nothing happens then these increases of price are compensated
through excess liquidity. Yet another approach to analyzing the problem is
to assume that when the price on one of the components of the consumer
basket goes up considerably it is necessary to take measures to make prices
on other components raise so as to allow for fighting with inflation. This
means that in conditions of a shock bound to increase of prices, both fiscal
and monetary policies shall be more austere so as to contribute to taming
the inflation and preventing it from rapid growth, thus avoiding strong
shock onto the population as well as on the business community.
If, for example, prices on fuel went up by 20 % while prices on other
products increased on the average by 5 % then the inflation will increase
from 5 up depending on the share of product holding the higher price. But
when measures are attempted to mop up excess liquidity – the scope pursued
is to compensate strong growth of price on one product by halting growth of
prices on other products.
Hence, we proceed to increase the norm of required reserves. Part of
money gets tied up with reserves and thus become more expensive. One could
expect an increase of interest rates on bank loans. We hear talks about
actually raising it up to 30 %. The ones willing to borrow will have no
incentive to do so. And then a question arises on how this measure of
increasing required reserves could cope with the intention to prop up
Comparing March of the current year with the similar period of last year
shows that money supply increased by about 42 percent. Since 2000 up to now
registered was an all-time-high lending to economy. At the end of 2007 the
volume of growth of lending was 52 percent while at the end of March the
growth was already 53 percent, which means that during the last months the
banks were lending at highest level ever. Accordingly, if the scope pursued
is to tame the inflation it is necessary to reduce the pace of lending
In fact, in a situation when there is excess lending growth, its volume is
exceeding the one characteristic of healthy economy.
The economic growth outlook for this year is fairly good. We project 6 to
7 percent growth for 2008 but in care of high-yielding crop and resumed pace
of production at the expense of export of vine and wine products then we can
aspire for even bigger progress.
But, clearly, for this to happen, the pace of lending to economy needs to
go down along with taking serious measures in order to reduce the inflation.
The Republic of Moldova faced similar situation with raising inflation
back in 2000. The interest rate on government securities was about 23
percent while the interest rates in banking system were about 32 percent.
And here is what is happening – we are going back to the same high level of
inflation. In order to reduce the inflation is necessary to tighten fiscal
and monetary policies. If we look back at past experience we can see that
application of adequate monetary and fiscal policies gives rather rapid
response. In just few months the inflation decreased from 17 % to below 5 %.
Rather rapid decrease was marked in the interest rates on T-bills as well.
It means that in case when rigorous measures are taken, fighting with
inflation could gain a success in just few months. Taken as an example could
be the case of Poland that got in the same situation and used same measures.