At the meeting of the Board of the Central Bank of the Republic of Uzbekistan on July 27, 2023, it was decided to keep the policy rate unchanged at 14 percent per annum.
Despite the decline in inflation and inflationary expectations, given the persistence of demand-side pressures on prices the policy rate has been kept unchanged in order to ensure that inflation remains in line with the forecast by the end of the year.
Since the beginning of the year headline inflation has been on a downward trend amounting to 9% year-on-year in June. In doing so, fading out last year’s high base effects, relatively stable import and regulated prices served as the main downward factors. There was no significant decline in services inflation due to the continued strong demand.
Core inflation, calculated excluding administrative and seasonal factors, decelerated more slowly than expected and amounted to 11.3% in June. As a result, the difference between core inflation and headline inflation is increasing. Also, average annual inflation is observed to be higher than the current inflation.
This tendency is reflected in the high share of goods and services with price increase of more than 10%, which indicates there is still demand pressures and an imbalance of supply and demand in consumer markets.
Having also decreased, inflation expectations of households and businesses amounted to 13-13.5% in June. Meanwhile, there is an increase in the share of respondents denoting the exchange rate developments and the raise in wages and pensions as the main inflation factors in the future.
In H1 2023 an economy grew by 5.6%, higher than the same period of last year. Growth of loans to the economy, increased budget expenditures, in particular, raised wages and pensions are among the main drivers of economic activity.
High growth pace in revenues from trade and paid services, real estate contracts, interbank transactions, and retail trade volumes indicate strong consumer demand in the economy.
Moreover, there is a significant rise in imports, which on the one hand indicates increasing domestic activity, and on the other hand, serves as a factor driving demand in the foreign exchange market.
The volume of cross-border remittances has been growing within its fundamental trend.
Although global economic activity has been growing faster than expected, uncertainty regarding its future trajectory still remains high. Global inflation is easing as the high base effects in world commodity prices wear off. However, in most countries core inflation is projected to remain high until the end of the year.
Even though the economic developments in the trade partner countries has a relatively positive impact on the domestic economy, there is devaluation pressure on the national currencies of some partners, which in turn might have some impacts to national economy.
In H1 this year, monetary conditions were ensured “relatively tight”. Activity in the interbank money market increased significantly, and the Uzonia rate as well as interest rates on interbank Repo transactions formed fully within the interest corridor close to the policy rate.
Average interest rates in the loan and deposit markets are forming almost without changes compared to previous months.
A growth of loans to the economy has been largely driven by loans to individuals. As of June, loans provided to individuals increased by 1.7 times compared to the corresponding period of the previous year. Meanwhile, the annual growth of retail loans slowed down slightly compared to the previous month. At the same time, provided corporate loans amounted at 116 trln. sum and increased by 13% in H1 this year, comparing to the same period of last year.
There is continued momentum in the growth of deposits in national currency, while the level of dollarization of deposits continues to decline. The increase in the volume of deposits in national currency is caused by high real interest rates on term deposits.
According to the updated forecasts, due to the continued adaptation of the economy to external economic conditions and the persistence of uncertainties real GDP growth by the end of 2023 is expected to be around 5.0-6.0%.
Meanwhile an increase in incomes of the population, fiscal stimulus and higher activity in the service sector will be the main drivers of economic growth.
By the end of this year, inflation is projected to form within the baseline scenario of macroeconomic development around 8.5-9.5%.
In the context of stabilized global commodity prices, recovery of supply chains, and enhanced domestic economic activity, persistence of higher core inflation indicates prevalence of fundamental demand factors putting upward pressure on prices in the economy and requires maintaining the current stance of monetary conditions for a longer period of time.
On the other hand, uncertainties regarding the duration of the recent improved dynamics in food import supply remain high. In addition, rising costs in agricultural sector may create additional pressure on prices in conditions of strong demand.
In order to ensure price stability in the medium-term perspective, based on the objectives of coordinated implementation of monetary and fiscal policies it is crucial to ensure the budget deficit not exceeding the set parameters.
In the coming periods, core inflation forecast and inflation expectations shifting to a reliable downward trajectory may allow to lower the policy rate.
The Central Bank will continue to thoroughly assess the impact of monetary conditions on aggregate demand, prices and inflation expectations. Measures to be taken will be aimed at forming inflation within the projected corridor and achieving inflation target in the medium term.
The next meeting of the Central Bank Board to review the policy rate is scheduled for September 14, 2023.
Source: Press release of the Central Bank of the Republic of Uzbekistan