Downward trend in core inflation and inflation expectations dynamics indicate that the secondary effect of the increase in energy tariffs on inflation are lower than expected, that strengthens confidence in the formation of inflation at the lower bound of the forecast corridor at the end of the year.
Relatively tight monetary conditions are serving to narrow the positive output gap and reduce inflationary pressure from the demand side.
Given the expected inflation dynamics and lower proinflationary risks, the Board of the Central Bank decided to cut the policy rate by 0.5 percentage points to 13.5 percent per annum.
In June, headline inflation amounted to 10.6 percent year-on-year, with a substantial decline in the persistent inflation components as well as fruit and vegetable prices. Also, price dynamics in the external markets continues having a downward impact on imported inflation.
Moreover, lower food inflation and stability of the exchange rate positively influenced inflation expectations of households, which significantly decreased in June. This provides conditions for a reduction in pressure on inflation from expectations.
Core inflation continued its downward trend, reaching 5.9 percent in June and decreasing by 2.6 percentage points since the beginning of the year. This is attributed to the fact that the secondary effect of energy tariff changes was lower than expected, thus signaling the probability of a continuation of the downward trend in inflation in the future.
The inflation projection has been revised down due to the lower-than-expected core inflation and weaker inflationary risks this year. Headline inflation is expected to be around 9 percent at the end of the year and approach the 5 percent target by the end of 2025.
In the second quarter of 2024, economic growth continued accelerating, with the economy growing by 6.4 percent in real terms in the first half of the year. Manufacturing, construction and services are major drivers of economic growth.
Strong investment activity, especially foreign direct and private capital investment, is one of the important factors behind the expansion of gross investment demand.
Despite a relative decrease in economic activity and business sentiment over the last two months, the indicators remain positive.
Amid expected continuation of high investment and production activity in the second half of the year, the real GDP growth forecast has been revised up to 5.7-6.2 percent by the end of the year.
Due to structural changes in the expenditures of households and business entities, aggregate consumer demand is projected to somewhat moderate.
Maintaining relatively tight monetary conditions in the economy serves to ensure the balance between aggregate demand and supply. As a result, the current positive output gap of 0.5-0.6 percent is expected to close by the end of the year, with its decreasing effect on inflation.
Export revenues and remittances are projected to grow higher than previously expected given strong economic growth in the major trading partners and favorable prices in the world markets.
In the second quarter of this year, there was a considerable increase in foreign currency inflows through various channels, that contributed to the stabilization of the soum exchange rate.
Overall liquidity of the banking system, dynamics of savings and loans indicate that the monetary condition remains relatively tight. This, in turn, will further increase the attractiveness of savings in soum thus ensuring high growth in households’ savings.
However, there are still some uncertainties regarding the continuation of the current dynamics of inflation expectations until the end of the year and pro-inflationary risks associated with persistently high core services inflation.
The Central Bank will continue ensuring relatively tight monetary policy aimed at achieving the 5 percent inflation target. At that, future decisions on the policy rate will depend on inflation dynamics and forecasts, inflation expectations, as well as incoming macroeconomic data.
The next meeting of the Central Bank’s Board to review the policy rate is scheduled for September 12, 2024.