The gradual subside of inflation become more evident after its peak. At the same time, signals of the negative impact of tight external financial conditions on domestic economic activity are emerging.

The lowering of the policy rate by 1 percentage point allows to completely remove the additional burden imposed by the increase in the interest rate against risks occurred in March of last year.

In this case, the policy rate at the 14 percent per annum ensures that relatively tight monetary conditions are maintained in the downward dynamics of the inflation forecast (8.5-9.5 percent).

In January-February this year, the annual inflation rate decreased to 12.2 percent per annum. In the first half of March, the prices on basic food products on consumer markets were relatively stable, and after rise in January, they moved towards downward trend.

The core inflation, that excludes seasonality and effects from administratively set prices, switched from growth, observed from the second quarter of last year, to a fall in the beginning of this year, and slowed down from 13.8 percent in December to 13.3 percent in January, and
13.2 percent in February.

As February Survey results show, inflation expectations for the next 12 months fell significantly compared to January, which, together with the dynamics of core inflation, produces conditions for further stabilization of prices in the coming months.

Certain risks and uncertainties govern external economic conditions. Global inflation continued to moderate in February, mainly driven by lower energy and food prices.

In addition to tighter monetary policies of key central banks, the increased demand on safe assets in the context of recent bank run episodes in international banking sector raises the volatility on financial and commodity markets.

The tighter conditions on global financial markets and weakening of national currencies of some trading partners, on the one hand, makes it difficult to roll over the external resources for financing domestic economic activity, on the other hand, they are widening the imbalances in currency inflows.

At the same time, prices and expectations on global food markets create favorable conditions on imports of goods. This, in turn, serves as a buffer against the inflationary effects partly coming from imports of foods.

According to preliminary data, the impact of short-term risks in domestic economic conditions have realized partially. At the end of January, there was a slowdown in the growth rates of retail trade, industrial production and construction work.

Although growth in the service sector has slowed compared to the same period last year, growth rates in this sector are higher than in other sectors. Taking into account the temporary nature of the risks and the counter measures taken in time, the stabilization of economic activity and recovery in sectors are expected by the end of the first half of the year.

Since the beginning of this year, monetary conditions index has been relatively tight, because of stronger real effective exchange rate and positive real interest rates.

Although the rate of Uzonia in the money market is formed invariably at 14 percent, the significant increase in the volume of operations indicates that the importance of this market is increasing in the redistribution of short-term resources by banks on interbak market.

Positive real interest rates contributes to higher growth of term deposits in national currency compared to the corresponding period of last year. Acceleration of loans in the national currency is also considered as a positive factor for the recovery of economic activity.

The Central Bank will continue to assess the impact of monetary conditions on aggregate demand, prices and inflation expectations in the economy.

Further steps will focus on maintaining the balance between keeping the inflation within the forecasted range, achieving the medium-term target and supporting the economic activity.

The next meeting of the central bank board to review the policy rate is scheduled for April 27, 2023.

Source: Press-releases on decisions of Board meetings of the Central Bank