At the meeting on September 4, 2023, the Board of the Central Bank decided to keep the policy rate unchanged at 14 percent per annum. This rate has been maintained since March 17, 2023.

Despite a marginal deceleration in inflationary processes, upward pressures on prices still remain in certain groups of goods. In August this year, there was also a rise in inflation expectations.

Since electricity and gas tariffs are left unchanged for the households, this component will have no primary effects on inflation. The secondary effects of tariff increases for business entities are expected to be in line with inflation forecast indicators.

Maintaining current relatively tight monetary conditions will serve to achieve inflation forecasts through mitigating demand-side pressures, caused by an income growth, and proinflationary factors.

After a certain decline in early summer, annual inflation in August amounted to 9%. Given almost unchanged food and non-food components, accelerated price growth in the services sector from 8.2 to 8.5% was one of the contributors to the higher inflation.

Core inflation fell at a slower rate than expected, amounting to 10.7% year-on-year. In the meantime, the downward trend in core inflation is getting sustainable.

Inflation expectations of the individuals for the next 12 months changed the trend and increased to 14.2%. A similar tendency was observed in the expectations of businesses, amounting to 14.4%. Exchange rate fluctuations as well as increased fuel and energy prices was denoted as key inflationary factors by respondents.

Global inflation has been slowing down largely owing to the stabilization of energy resources and commodity prices. However, core inflation has been remaining significantly high and persisting in many countries. Tight labor market causing wage increases has been resulting in persistent inflation pressure in the services sector.

The economic situation in trading partners has been developing under the influence of exchange rate depreciation and the dynamics of commodity prices.

Having adjusted in August, soum exchange rate also impacted on the real effective exchange rate, which started moving in line with its long-term trend. Until the end of the year, it is expected that there will be no factors dramatically changing this dynamics.

According to the latest statistics for January-July of this year, the volume of services, industrial production and retail sales steadily increased.

Alternative indicators of economic activity prove that aggregate demand in the economy has been developing at a high pace. In January-August of the current year the number of real estate transactions rose by 7.7%. One of the factors supporting economic activity continues to be the annual growth of loans to the economy by 1.3 times.

Total cash receipts grew by 30.4% in January-August, while revenues from trade and paid services increased by 27.7%. Meanwhile, the volume of cross-border remittances had the reverse trend, declining by 32.4% under the high base effect, while still maintaining a considerable upward momentum compared to the 2021.

Maintaining the policy rate of the central bank unchanged and its transmission to the money market contribute to a positive real interest rate of
3-4% for short-term liquidity, thus helping to ensure moderately tight monetary conditions.

Positive real interest rates continue to support activity in the deposit market. In August, the weighted average interest rates on households’ term deposits in the national currency amounted to 21.7%, while those of legal entities were equal to 17.1%.

As a result, as of September 1, an increase of outstanding term deposits amounted to 48.3%, including 53.5% growth in term deposits of individuals.

In view of the emerging domestic and external economic conditions, by the end of the year the inflation rate is expected to be within the forecast corridor of 8.5-9.5%.

Meanwhile, further increase in aggregate demand driven by fiscal stimulus, income growth and retail lending is considered as an upward factor for prices over the forecast horizon.

Higher inflation expectations and perceived inflation in August indicate that they are largely based on the current price dynamics and are not fully anchored to the forecast parameters.

Also, high growth of loans to households in retail lending sector adds to concerns in terms of debt burden and impact on domestic demand in this segment.

Maintaining the policy rate at the current level will provide conditions for inflation to form within the forecast until the end of the year and is viewed as a prerequisite measure to mitigate the impact of monetary factors on prices.

The Central Bank will continue to thoroughly assess the effect of monetary conditions on aggregate demand, prices and inflation expectations. The measures taken will be aimed at formation of inflation within the forecast corridor.

The next meeting of the Central Bank Board to review the policy rate is scheduled for October 26, 2023.

Source: The press release of the Central Bank of the Republic of Uzbekistan