One after another, the banks this month started to increase the interest rates on deposits and loans. The interest on deposits in lei reached 19.0%, while on deposits in euros and US dollars 11% and 12% respectively. Such a tendency appeared as a result of the high inflation and of the central bank’s recent decision to raise the norm of mandatory minimum reserves by one percentage point to 16%, only six months after it increased the norm by 5 percentage points. The rate of inflation in the first quarter of 2008 was 4.1% compared with December 2007, hitting a yearly average of about 15%. Eximbank announced an interest of 19% on the deposit in lei “Spring Gift”, of 12% on deposits in US dollars and of 11% on deposits in euros. Moldindconbank increased the interest on deposits in lei to 19%, while Investprivatbank, Moldova-Agroindbank and Energbank to 18.5%. Ultimately, the higher interest rates have the effect of a boomerang. Engaging in a race with the inflation, the banks raise the rates and this rise is a bad signal for the inflationist expectations. The banks have not changed their behavior in the past one year and a half and increase the interest rates on loans and deposits almost at the same pace, the margin being 3.32 percentage points or almost twofold lower than the average of 6.25 points for 2006. [What do experts say?] During half a year, the National Bank of Moldova (NBM) has raised the mandatory reserves two times. Consequently, considerable amounts are withdrawn from circulation at a time when the banks could offer this money to companies. The banks have smaller resources and, evidently, they become more expensive, economist Veaceslav Negruta considers. The NBM data show that banks’ compulsory reserves in the central bank’s accounts grew by about 800 million lei after the last year’s rise in the mandatory norms, to 2 billion lei. As to the increase in the rates on deposits, this is related to inflationist expectations. “The commercial banks have their own forecasts for inflation. But the fact that the National Bank and the Government predicted single-digit inflation for 2008 at the start of this year, while First Deputy Prime Minister and Minister of Economy and Trade Igor Dodon began to speak about a rate of inflation of 11.8% already is challenging the inflationist expectations,” Veaceslav Negruta said. According to the economist, the banks maintain sufficient liquidity and there is no shortage of cash. The higher rates are principally generated by inflationist expectations. The statistical data for the first three months do not bring good news about inflation. Besides, the expected rise in the prices of energy resources cause strong inflationist expectations. If the average interest on deposits in lei over February-March 2007 had been under 14.0%, the central bank’s data for the last two months of 2008 show over 16.0%. “The society and the banks understand that the real inflation is much higher than the officially announced one,” said Veaceslav Ionita, economist, expert at IDIS “Viitorul”. According to him, the rise in interest rates was also determined by the pressure on the currency and financial markets, caused by the currency surplus and by the fact that the NBM has to intervene on the market. Thus, the commercial banks are in a very favorable position. The business risks are low and the banks can afford attracting money at a rate of 19%. “The inflation is now much higher than the Government and the central bank planned. Nothing could be done during three months and no one knows what follows next. The March increase in the base rate and in the mandatory reserves also has had an impact,” said Ana Popa, expert of the Independent Analytical Center “Expert-Grup”. [More costly inflation] The central bank seems to more often manifest despair at the rising inflation and flow of foreign currency on the home market. It is a situation with little space for maneuvers. The NBM makes everything possible to bring down inflation. Under the law, the central bank’s major objective is to curb inflation. And the pressure is strong indeed. A weakening dollar in relation with the euro is influencing the situation from outside. The internal factors exert powerful pressure on the currency market. The net supply of foreign currency from individuals last year rose by 43.5% to 1.712,3 billion USD. The net flow of direct and portfolio investments and of loans taken from affiliated persons increased 3.2 times to 240.7 million USD, while the net flow of private foreign loans, grants and technical assistance grew 2.6 times to 287 million USD. These tendencies persist in 2008 too. The net supply of foreign currency from individuals in the first two months of this year increased 1.9-fold. In order to “immobilize” the excessive money supply, the central bank increased the norm of obligatory reserves on the one hand and makes more and more sterilizations on the other hand. The average daily balance in February and March was 1.772,2 billion lei and, respectively, 1.506,1 billion lei. The inflation is more and more costly. The average nominal rate of transactions reached 16.16%, an increase of over 2 percentage points year on year. The central bank pays much for the sterilizations. Millions of lei is paid for this “immobilization” of the financial resources withdrawn from circulation, while the economists warn that Moldova could experience the situation of the countries that came closer to the EU and were imposed to make sterilizations, but could not due to the high costs. [Market indifferent to rise in base rate] The National Bank rose the base rate by 2.5 percentage points in September 2007 and by one more percentage point in March 2008. The market reacted very anemically to this change, which is a signal in other economies. The average rate on deposits in lei increased insignificantly after the first rise, while the rate on deposits in foreign currency practically did not change. The loans did not grow more expensive either. The only reaction was the reduction of about two percentage points in the average rate on interbank loans in Moldovan lei. [Contradictory forecasts] The forecasts about the interest rates on loans and deposits for the next period are different. “They cannot grow any further,” says the economist Veaceslav Negruta, who yet does not exclude an inflation rate of 14-16% in 2008 if the gas, electric power and other resources continue to grow dearer. Veaceslav Ionita thinks that the interest rate did not reach a limit yet. “The race has just begun.” The Minister of Economy and Trade is not sure anymore that the Government will manage to achieve single-digit inflation this year and speaks of a rate of 11.8%. A high inflation rate will make the banks maintain a corresponding rate on loans and deposits. The population and companies will not want to keep their savings in banks if these do not offer rates higher than the inflation.