Moldovan National Bank increases base rate in attempt to halt fall of national currency

Chisinau, 17 February /MOLDPRES/ - The Board of Directors of the National Bank of Moldova (BNM), today convened at a special meeting, and ruled to increase the base rate from 8.5 to 13.5 per cent. "This is a significant tightening of the monetary policy", said BNM Governor Dorin Dragutanu in a press conference today.

"We see that the things have lately precipitated a little on the exchange market and we believe that this is a good moment to increase the base rate applied to the main monetary policy operations by five percentage points. Tightening monetary policy aims both to anchoring inflation expectations, i. e. keeping inflation at the target level, as well as more increasing the value of the Moldovan leu," said the governor.

According to him, BNM expects commercial banks to speed up the increase of interest rates on deposits and loans in lei. Dragutanu stressed that the increase of the interest rate on deposits was important "to encourage savings in lei and to discourage migration from deposits in foreign currency to deposits in national currency."

Increasing the base rate will result in more expensive loans, "but this is the rule of the game, we are in a crisis and we must choose the point of compromise of monetary policy, on the one hand, to stabilise the exchange market, and on the other hand, to keep the cost of loans in lei at an acceptable level."

At the same time, the National Bank will continue to intervene on the currency market by selling currency. "We will keep selling currency, but in a rational manner, as the foreign exchange reserves are not a bottomless pit", said the governor. He added that the National Bank made sure that foreign exchange reserves were enough for "a longer period of time, as you never know how things will evolve."

Referring to the depreciation of the leu by 25 per cent in the first six weeks of this year, the BNM governor said the devaluation was due to the decrease in remittances and exports, as well as other foreign factors. "In November, exports fell by 18 per cent against the same period of the previous year and by 11.5 per cent in December. On the other hand, imports decreased by 4.6 per cent in November and 9 per cent in December against the same period of 2013", said Dragutanu.

According to the governor, "we are most likely witnessing economic adjustment, the adjustment of imports. We see that the shock of reducing transfers is absorbed by the economy via reducing imports". At the same time, the diminution  of transfers also had a negative impact, especially at in late 2014. In October 2014, “remittances decreased by 9 per cent against the same month of 2013, in November - by 29 per cent, and in December - 31 by per cent."

The most significant cause affecting the transfers entering the country "is the recession in Russia. The emittances in Russian rubles fell by 41 per cent in December."

The BNM governor described the statistics on the supply of currency as "worrisome." In 2014, the deficit of currency on the market amounted to 834 million dollars. Private persons covered 33.9 per cent of the economic agents’ demand in November, 33.6 per cent December 2014, and 47.2 per cent in January 2015.

Dragutanu explains the decrease of supply by the cutting of remittances, as well as the negative expectations the residents have been having for the further developments and their willingness to buy foreign currency and unwillingness to sell it.

The BNM governor said that the central bank did not intend to apply administrative restrictions on the foreign exchange market, which "have a very short-term effect, distort the market and further worsen the shortage of currency."

(Reporter V. Berco, Editor M. Jantovan)