NBM INTENDS TO KEEP INFLATION UNDER 10 PERCENT
On September, 26th the Administration
Board of the National Bank of Moldova has made a decision to raise the
base rate by 2.5 percentage points, from 13.5 up to 16.0 percent.
The statement of NBM press-service says: the base rate was increased
because of the concern about the prospects on maintaining inflation
under 10% by end-2007 and reflects the intention of the central bank to
use all tools available at its order to ensure price stability.
The progress in reducing inflation achieved in the first half of year,
the press release says, has been hampered by the consequences of the
drought, which has led to a significant rise in food prices, as well as
to a significant growth of inflationary expectations due to the same
Besides, this year an essential growth of remittances has been
registered and the National Bank of Moldova had to purchase currency
actively, which has determined the non-compliance with a number of
established monetary indicators. The situation was also affected to a
certain level by the growth of lending/credits to the economy of
Republic Moldova, in particular lending/credits in hard currency.
The increase of the base interest rate has complemented the recent
decision of NBM Administration Board to increase gradually the level of
mandatory currency reserves of commercial banks by 5 percentage points.
"The undertaken actions aim at weakening inflationary pressures and to
determine the decrease of the inflation rate down to the agreed levels",
specifies the NBM press release.
We have asked the NBM’s First
Vicegovernor, Mr. Victor CIBOTARU, to comment on
these decisions and to tell us about prospects:
- Till last year the primary goal of the National Bank of Moldova was to
maintain the exchange rate stability. But, bearing in mind the world
experience that has proven to be appropriate in most developed
countries, the priority goal has changed. According to the amended NBM
Law, the primary goal of NMB now is maintaining price stability.
The theories applied by monetary authorities in many countries are based
on the belief that a low stable rate of inflation promotes long-term
development of economy. The current goal of the National Bank of Moldova
is to achieve an one-digit annual growth of inflation in the country.
Also, the evolution of inflation should be even, without significant
Why is high inflation "bad"? It is known that first of all inflation
"eats up" the budgets of poor people. But also, by and large, it also
does not benefit the solvent population. Any momentary "prize" from the
upsurge of inflation in most cases turns into a "loss" in the long term.
When inflation develops at uncontrollable rates, it destabilizes the
situation in the commodity and monetary markets, and, thus, leads to
significant growth of risks. Once inflation grows, the population’s
interest to save decreases, interest rates grow, investment
opportunities worsen. Still, without investments into economy there are
no chances for strong long-term development. A low stable rate of
inflation creates conditions for investments and for stable inflow of
capital to the promising branches of economy, for the development of
infrastructure, for projects which have long-term positive consequences
for the economy.
It is a rather popular belief that inflation in Moldova has
"non-monetary origin", that is, is caused by a rise in prices on the
imported goods, drought, inflows of foreign currency to the country...
To put it briefly, they talk about reasons outside the sphere of the
control of monetary authorities. Consequently, the National Bank of
Moldova cannot and should not fight inflation.
To answer the promoters of such point of view, it is necessary to tell:
in the long-term inflation always has monetary character. The reason is
that, ultimately, the price level depends on the growth or decrease of
the money supply. However, it is necessary to understand that inflation
is a change of the general price level rather than of separately taken
prices for concrete goods or even groups of goods.
When we consider the short-term period, non-monetary factors can and do
affect the price level. They can accelerate or, on the contrary, slow
down inflation. This was the case with the growth of prices for energy
resources or the prices for specific food items. Certainly, they cannot
be regulated NBM. But, as a rule, non-monetary factors influencing
inflation have no constant character. For instance, this year we had,
while next year it is possible that the harvest will be pretty good.
Also, it is necessary to take into consideration, that due to the modern
development of foreign trade prices in the home market, including in our
country, are rather strongly connected with the situation in the
Speaking about non-monetary factors that influence the price level in
the home market, I would like to draw one’s attention that one of the
most essential of them is the "inflationary expectations" factor. Edmund
Felps, an American economist, and a Nobel prize winner in 2006, has
said: "Inflationary expectations generate inflation". The expectations
of market participants – the whole range of them - influence
significantly the situation in the market. If the level of inflationary
expectations raises people spend money easily. Due to this, "the money
supply" grows, which determines the price level for the current period.
The central bank of any country can influence the "monetary
expectations" factor only indirectly. And I am going to tell more about
it a bit later.
During the last four years inflation in Moldova has been balancing
between 10 and 15 percent. Since October last year, due to the sustained
actions of NBM, inflation has been decreasing constantly. Until June
this year. In July and August the statistics has registered appreciable
enough jump of inflation. For two months inflation in annual calculation
has increased for 3,1 percentage items, up to 13,5 %. Due to this, NBM
had to undertake a number of needed measures, to stabilize the inflation
rate and reduce inflationary expectations.
Were NBM’s actions an "intervention"? Both yes and no. "Yes" in sense of
general influence on the situation in the monetary market. "No in the
sense of intervention to establish concrete prices for concrete goods
and services in the market. The overall objective of the increase of the
base rate and of the requirements on the banks’ mandatory reserves is
the necessity to carry out additional withdrawals of excessive liquidity
from the market, that, in turn, will lower the monetary supply and,
accordingly, the inflation rates. As for the question whether the NBM’s
base rate increase will affect the banks’ interest rates, it is possible
to answer unequivocally that there is no direct correlation dependence
between them, since currently NBM does not lend to banks; quite the
opposite, it withdraws from them the "excessive liquidity".
Now we continue to monitor actively the situation and we will, of
course, trace the consequences of our recent decisions on the increase
of the banks’ mandatory reserves in foreign currency, as well as on the
increase of the NBM’s base interest rate. Today NBM works systematically
to enhance its ability to analyze and to foresee in a timely manner the
possible variants of development of the situation. Unfortunately, while
we do not have the means to trace changes in the inflation rate at least
every ten days and we have to operate with the data provided by the
National Bureau of Statistics, i.e. end-of-month data.
With the purpose to find the most effective and adequate tools of
influencing the inflationary processes adequate for the level of our
economy, the NBM experts have studied thoroughly foreign experience.
Literally last week and IMF technical mission has finished its work. We
have had a very useful exchange of opinions about its outcomes. In
particular, the mission members - two members of staff of the central
Bank of the Czech Republic - have told us about their experience of
decreasing the inflation rate and its stabilization in their country,
which have been going through a similar period of development
seven-eight years ago.
By and large, NBM does not invent anything new. The path we are starting
to follow now has been taken by many before us, including the countries
of the Central and Eastern Europe. The base interest rate increase is
not an end in itself, but rather a necessary condition for the decrease
in inflation and, thus, for the establishment of stable low interest
rates which will ensure access to credit resources to a broad range of
borrowers, including small and medium-size businesses.