The speech of the NBM Governor Dorin Dragutanu at the press conference on: Monetary Policy Strategy of the NBM

Monetary Policy Strategy of the NBM for 2010 – 2012

How will inflation be kept under control?

According to the Law on the National Bank of Moldova, the primary objective of the NBM is to achieve and maintain price stability.

Price stability can be defined as a situation in which prices’ increase is low enough, so that it does not have a significant impact (I would say negative) on the economic decisions of the society. There is a broader concept in the world on the role of price stability in the achievement of a sustainable and healthy economic growth. At the same time, a high inflation has, as well, a negative effect on the standards of living of the population, mainly, through the erosion of incomes and the reduction of purchasing power.

Achievement and maintenance of price stability suppose a set of measures undertaken by the NBM for the creation of an economic framework, following the inflationary evolutions of the country.

The Monetary Policy Strategy of the NBM for 2010 – 2012 informs the broad public on the key elements of the way the NBM will achieve and maintain price stability.

Three principles were on the basis of the elaboration of the strategy, I would name them cubic „C”. These are:

Clarity of strategy;
NBM credibility and
Transparent communication.

Clarity of strategy

In order to increase the clarity, the Strategy contains an interpretation of the monetary policy objective and explains the monetary policy regime, the monetary policy instruments and the monetary policy transmission mechanism. The strategy includes a clear time horizon, the NBM’s objective is to maintain price stability on a medium-term, namely an inflation (measured by the consumer prices index published by the National Bureau of Statistics) of 5% per annum with a possible deviation of ± 1 percentage point in 2010 and setting of inflation rate into a medium interval of one figure in the period of 2011-2012.
The NBM monetary policy decisions will be based on the macroeconomic previsions, which mean that irrespective of the present inflation level, the NBM will look ahead and will undertake decisions to maintain the inflation within the interval established on medium-term.

NBM credibility

The economy of the Republic of Moldova presents the characteristics of any developing economies, for instance the prevalence of offer-side shocks, the fragility of fiscal institutions, the undeveloped financial market (and the use of less sophisticated instruments), the vulnerability towards the capital flows (mainly the sudden interruption in capital inflows) and the labour force migration (implicitly, the dependence on the volume of remittances from abroad). Simultaneously, there is a series of other exogenous factors (outside the NBM control), for example, the modification of administrative prices, taxes and the cost of import goods (mainly, of energetic resources) that reduce the efficacy of measures undertaken by NBM to maintain a low rate of inflation.
Nevertheless, we would like to reiterate that the NBM will undertake all necessary measures for the achievement of established objectives. There is a possibility that during 2010-2012 the inflation for the last 12 months comes temporarily out from the establish interval. This fact should not be interpreted as a NBM failure. The NBM actions should be interpreted and assessed within an average time horizon and not at a certain date.

Transparent communication

     The fundamental objective of the NBM to achieve and maintain price stability supposes a major responsibility towards the broad public.
     With a view of ensuring a transparent communication of monetary policy decisions and of results of undertaken actions, the NBM published on the official web-page the schedule of monthly meetings of the Council of Administration of the NBM on monetary policy (last Thursday of each month). The monetary policy decisions will be published at the latest the second day after the Council of Administration meeting.
     Immediately, after the publication of the consumer prices index by the National Bureau of Statistics, the central bank will monthly publish a press release where the determinants of inflation will be analyzed and an assessment of the forecast on inflation will be carried out.
     Also, the NBM will quarterly publish the Monetary Policy Report, which will include an analysis of the macroeconomic situation and a forecast on an average term (2 years) of inflation and of the main macroeconomic indicators.
     Finally, the NBM will hold a continuous dialogue with mass-media and economic analysts on inflationary processes of the Republic of Moldova.
     We consider that these 3 principles of the strategy (clarity, credibility, communication) will contribute to a better understanding of the NBM monetary policy decisions.
     The NBM will tightly collaborate with the Government and public central bodies with the purpose of achieving and maintaining price stability, and of creating a favourable framework for a sustainable growth and maintenance of the standards of living of the population.