At a meeting on January 26, 2023, the Board of Governors of the Central Bank of Uzbekistan kept the policy rate unchanged, at 15 percent per annum

The economy continues to be stimulated by domestic and foreign demand factors. The increased external inflationary environment along with rising incomes in the economy resulted in relatively high core inflation numbers over the recent months.

The current level of the policy rate is viewed as sufficient for maintaining moderately tight monetary conditions in the economy. Based on the current economic conditions and fiscal policy, in the coming quarters, additional measures on balancing the aggregate supply and demand are likely to be implemented.

Sustainably high economic growth rates were observed over the recent quarters. The key demand driver was the growth in aggregate consumption with relatively moderate investment activity. By the end of the year, real GDP growth was in line with Central Bank’s October projections and amounted to 5.7%.

Despite relatively stable fiscal stimulus in 2023, lagged effects from the fiscal deficits, accumulated during the last 3 years, on aggregate demand remains significant. Stable labor market, rising wages and increasing cross-border remittances boost the demand on durables and real estate, exerting price pressure in these markets.

The extent to which the current positive trends will stay in place depends on the stability of the supply factors, in the coming quarters.

Meanwhile, some short-term supply-side risks have arisen because of abnormal weather conditions, which may affect the production and supply of certain goods.

Over 2022, the economy adjusted to changes in external conditions. The impact of external economic conditions was relatively short-lived and less pronounced compared to initial projections. This resulted in increased foreign exchange inflows from exports and cross-border remittances.

Alongside with expectations on more favorable prices on world markets, there are risks and uncertainties associated with lower global growth prospects and the prospects on key trading partners.

In 2022, there was a price growth over a wide range of goods, which has resulted in acceleration of annual headline inflation to 12.3 percent.

The core inflation also had a sustained growth path, having reached 13.8 percent, over the last six months of the year. This, together with relatively higher producer prices, is an indicator of rising inflationary pressures. Inflation expectations also show a moderate growth, in the last three months. Their direction raises the probability of upward shifts n inflation risks.

As the global economy adjusted to the ongoing changes and central banks tight their monetary policies, global inflationary trends and rise in on basic food prices gradually subside. Together with stable exchange rate, this may curb the inflationary processes in the economy.

Since the second half of the year, the growth of loans to the economy has slightly accelerated due to lending in domestic currency. Considerable growth is observed in retail lending.

Due to positive real interest rates, deposits, including those of household, increase rapidly.

Overall, since the second half of 2022, there were structural changes in the modes of financing the local economy. The transition of banks to internal sources of financing has accelerated. This, together with the effective accumulation of available financial resources, has contributed to the reduction of dollarisation of the economy. This expected to be continued in 2023.

According to preliminary estimates, the probability of real GDP slowdown in the first quarter of the current year is high, and by the end of 2023 the economy is projected to grow by 4.5-5 percent. According to baseline projections, the inflation is expected to be in 8.5-9.5 percent range, in 2023.

The room for the monetary policy may be limited, on the one hand, by accelerating core inflation and structural changes in the economy, and, on the other hand, by risks in external environment and supply factors.

The Central Bank will continue to assess the impact of monetary conditions on demand, prices and inflation expectations carefully. The measures aim at balancing the supply and demand factors, rearing the inflation at the forecasted values, with the medium-term target of 5 percent.

Should the situation necessitate, Central Bank together with relevant ministries and departments, will take additional measures on reducing non-monetary inflationary factors, including the elimination of supply chain disruptions and ensuring the supply of required goods.

The Central Bank’s Board will hold the next meeting on policy rate on March 16, 2023.