At the meeting on March 14, 2024, the Board of the Central Bank decided to keep the policy rate unchanged at 14 percent per annum.
Given ongoing uncertainties in achieving a balance of supply and demand in the economy and expectations exerting upward pressure on inflation, in order to ensure appropriate monetary conditions for bringing inflation to the 5 percent target the Central Bank Board decided to keep the key rate unchanged.
Having been declining from the beginning of the year headline inflation amounted to 8.3 percent in February. However, in recent months there has been an acceleration of service inflation due to strong demand and a number of increases in regulated prices and tariffs. Moreover, inflation expectations of the population and businesses remain virtually unchanged and are still high.
By the end of this year, inflation is expected to be within the forecast range of 8-9 percent. There is still uncertainty over the forecast horizon regarding changes in regulated prices and their effect on inflation expectations.
According to preliminary data, the main output indicators grew at a higher rate compared to January-February last year. Also, a slowdown in some sectors, particularly in food production, since the beginning of the year, may cause an imbalance of demand and supply in the domestic market or put additional pressure on imports in the short term.
In general, the economy is expected to grow at a higher rate in the first quarter, while the economic growth in the subsequent quarters is highly likely to be within the baseline forecast of 5.5-6 percent.
Strong fiscal incentives last year and at the beginning of this year will be among key drivers of aggregate consumption in the coming quarters.
Meanwhile, cross-border remittances, developing within the last year’s indicators, and the current dynamics of households’ real income will have no additional pro-inflationary pressure on consumer demand in the future.
There is strong activity in the labor market and an increase in demand for labor force. The major growth in demand for labor force accounts for the services sector, resulting in higher wages. Meanwhile, amid sustained increase in prices and income in the services sector, investment inflow in this sector and its share in consumer spending will increase.
There is still a high increase in imports of machinery and equipment, energy and petroleum products and ferrous metals, which, on the one hand, provides grounds for further production growth, while on the other hand, also implies the trade balance deficit will persist.
Current account balance will depend on the extent of fiscal discipline, foreign investment inflows and the effectiveness of structural reforms aimed at enhancing the export capacity of the economy.
Monetary conditions will still remain relatively tight in the next quarters. UZONIA interest rate will develop in line with the key rate owing to strong activity in the interbank money market since the beginning of the year and increased use of monetary instruments.
Savings activity continues increasing, particularly reflected in the growth of deposits in the national currency. Overall, annual increase in deposits is expected to substantially exceed the growth in lending.
An increase in the share of domestic and private sources in the banks’ resource base influences market interest rates. In recent months, no significant movement was observed in the weighted average interest rates on loans in the national currency. However, recent adjustments in the operational mechanism of monetary policy will reduce the cost of short-term money, thus providing grounds for further decline in interest rates on loans.
The Central Bank will continue implementing a consistent monetary policy aimed at achieving the 5 percent inflation target. At that, particular emphasis will be placed on the balance of supply and demand in the economy, inflation expectations and the dynamics of regulated prices.
The next meeting of the Central Bank Board to review the policy rate is scheduled for April 25, 2024.