At a meeting on September 8, 2022, the Board of the Central bank decided to keep the policy rate unchanged at 15 percent per annum

In July-August, the annual rate of price growth was moderated and was higher than the indicators in the corresponding period of the previous year. Also, inflationary expectations in the economy are still at
14-15 percent, despite the decrease compared to the high level observed in May.

In the coming months, the aggregate demand is expected to grow due to  the further increase in economic activity and the rise in seasonal revenue in the agricultural sector, moreover inflationary risks  related to energy supply and the supply of some products in the domestic market are continuing to exist.

Taking into account the above, it was decided to keep the policy rate at 15 percent per annum. This, in turn, serves to mitigate the impact of monetary factors through savings and credit channels, maintaining the attractiveness of local currency assets.

Domestic economic conditions. Stability in economic activity is maintained in the context of expansionary fiscal policy, significant growth in the volume of foreign trade operations, and an increase of loans to the economy.

In particular, according to the results of the survey conducted in August among enterprises of the real sector, the index of economic activity was formed at a higher level compared to previous months and amounted to 55 units.

In January-August 2022, banks allocated 18 percent more loans compared to the same period last year, particularly 50 percent more to households.

The raise of pensions and wages and the increase in the volume of cross-border remittances to the country, in turn, led to a 1.3-fold growth in the volume of cash receipts in the sectors of trade and payment services compared to the corresponding period of the previous year.

Current uncertainties in external economic conditions have both positive and negative effects on the economy of our country. While prices of global logistics services continue to rise, there is a relative slowdown in the growth of prices for basic food products along with a decline in prices for some of them.

In January-August of this year, growing trends were observed both in export revenues and import payments. Export revenues increased
by 37 percent, import payments rose by 27 percent, and the volume of
cross-border remittances grew by 2.2 times compared to the same period last year.

These developments observed in foreign economic relations balance the domestic currency market and has a positive effect on the stability of the national currency exchange rate.

Inflation and inflation expectations. Inflationary pressure remains high due to external and internal economic factors affecting supply and demand in consumer markets. In August, the annual inflation rate amounted to 12.3 percent.

Here, food prices increased by 16.3 percent, while non-food goods and services rose by 10.9 and 7.1 percent, respectively.

At the end of August, the households’ inflation expectations for the next 12 months declined to 15.3 percent, and expectations of entrepreneurs decreased to 14.1 percent, remaining, however, higher compared to current inflation rates.

Also, the growing trend of core inflation formed during the current year reflects inflationary risks remaining in the economy. Annual core inflation amounted to 12.4 percent in August, and its contribution to overall inflation reached 9.4 percent.

Monetary conditions. In June-July of this year, due to the reduction of the policy rate by 2 percentage points and annual inflation almost plateauing within the forecast, “relatively tight“ monetary conditions are emerging in the economy.

Weighted average interest rates in the interbank money market decreased to 14.6 percent in August, and the UZONIA index was formed fully within the interest corridor with small fluctuations.

Due to the reduction of the policy rate, a slight decrease was also observed in the weighted average interest rates on term deposits in national currency, which in July amounted to 20.8 percent for individuals and to 17.2 percent for legal entities.

The continued positive real interest rates in the deposit market caused the significant growth (25.3 percent) of the volume of term deposits in the national currency in the last 8 months of this year.

The downward trend in interest rates on loans in national currency continued in August.

Risks and uncertainties. A number of risks related to inflation and aggregate demand are remaining in the domestic economic conditions.

Fiscal impulse implemented in previous periods and this year continue to put upward pressure on domestic prices. In particular, due to fundamental factors, core inflation has a rising trend, and its contribution to overall inflation is increasing.

The persistence of logistical problems related to the supply and high prices on the main import products (mainly on non-food goods for the rest of the year) may have an upward pressure on the prices in the consumer markets in the coming months.

At the same time, further revival of economic activity in the autumn months and seasonal increase of incomes in the agricultural sector will create additional demand in the domestic consumer market until the end of the year. In the autumn-winter season, the rise in demand for some fuel and energy products and heating means also raises concerns about the increase in the prices of transportation and delivery services.

Uncertainties arising as a result of the changing situation in the global economy, tightening of financial conditions in international markets and inflationary processes are complicating the development of macroeconomic forecasts and assessments.

Expectations on economic growth in the world and trading partners have worsened compared to previous forecasts, and prices of basic commodities have also been trending downward. This, in turn, may affect the external demand in the future.

 In the context of current inflationary processes, monetary conditions, the effect of imported inflation and high uncertainties, the latest forecasts regarding the formation of the inflation at the end of the year have been left unchanged at 12-14 percent and expected to be close to the lower bound of the forecast corridor.

Inflationary factors and risks caused by external and internal economic conditions will be carefully studied and appropriate measures will be taken to eliminate them.

The next meeting of the Central Bank Board to review the policy rate is scheduled for October 20, 2022.