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Better still one might acknowledge that swelling inflation comes as no surprise. To put it differently, National Bank informed IMF and WB that Republic of Moldova might miss the 9% inflation target. Afterwards "official sources" talked to media of a different target, i.e. 10%. Noteworthy, if Central Bank had not taken the decision to let Leu appreciate, probably the cumulative inflation rate for 2004 would have been twice as big.

As a rule upon price hike, interest rates go up and not down. It is all-too-clear: Leu depreciation, meaning cheaper imports, seeks to reduce inflation, whereas interest rates seek to diminish the risk of speculative capital inflow.

Still, latest developments on the monetary market in 2004 marked by price hike (implicitly of the inflation) amidst considerable Leu appreciation, signals some risks as regards National Bank activity. We believe that appreciation of the exchange rate in real terms was brought about by National Bank promoted monetary policy of rigorous control of monetary base (M0). One may say that during the aforesaid period National Bank had a more of a directive policy.

At the same time, average interest rate on deposits surged (from 16.8% to 17%), especially due to growing deposits in Lei by natural entities. However, it is impossible to boost savings unless there are positive interest rates in real terms, while confidence in the national currency would drop if nominal interests on deposits did not exceed inflation rate.

Financial analysts say depreciation of US dollar would boost economic growth, however inflationist risk would eventually lead to restrictive economic policies mainly by raising interest rates, which would result in an inflow of foreign capital and investments, that in turn would boost production and create new jobs.

Ok, then why it is so important for the inflation not to go astray too much from the initial course? It is because a substantial deviation would cost us some dear points of credibility would inhibit investors and creditors. Under the circumstances when inflation pushes us to the outskirts of CIS countries, any delay would be sanctioned harshly by the international community.

Having said that, we should not forget that monetary authorities stated in spring that under a pessimist scenario, they would categorically shoot for the target even if it were on the expense of slowing down economic growth. They explained that partially sacrificing economic growth in 2004 would consolidate the growth on a long term, which is exactly what Moldova needs to bridge the gap. Unfortunately, the things are exactly opposite. We would over-perform on economic growth and under-perform on inflation.

Finally we have one last issue to discuss. NBM claims that inflation would go down at the end of 2004, however it predicts that inflation decline would halt temporarily early next year as a result of surging energy price and high oil price. Albeit we agree in principle with that position, still skyrocketed prices on food are likely to propel a general price hike.

Noteworthy, in September and October bread and meat manufacturers were hardly persuaded to adjourn or diminish the price hike. In order to be more persuasive, Government gave up on important sources of revenues, it temporarily reduced by half the customs tax on certain food products. Inevitably, the realities would prove that administrative measures have a limited impact.

After elections nothing would stop manufacturers to raise the prices. Inflationist outburst would last for as long as the money from electoral charity would last. And why is it that food counts more than energy when it comes to inflation? That is because in 2005 consumption basket at the Statistics Department, the energy price would have the reduced weight of 2003, whereas food would have the high weight it used to. According to this scheme, it is not the energy that fuels inflation, but rather meat, bread and diary.

The end of the year casts a glimpse many politicians refuse to see: monetary policy has reached its limits in administering economy. Furthermore, reduction of arrears is necessary for a healthy drop of inflation.