At the meeting on June 13, 2024, the Board of the Central Bank decided to keep the policy rate at 14 percent per annum
In order to curb the impact of changes in energy tariffs on inflation expectations, the Board of Central Bank decided to maintain monetary conditions at a relatively tight level and leave the policy rate unchanged at 14 percent.
In the presence of inflationary risks caused by high aggregate demand and secondary effects from tariff changes, the Central Bank will continue to maintain positive real interest rates in the future that are sufficient to reduce inflation to the 5 percent target over the forecast horizon.
In May, headline inflation accelerated and reached 10.6 percent per annum following an increase in energy prices for households. Excluding the energy prices, the inflation rate was 6.8 percent, which is attributed to a significant seasonal decline in food component.
The impact of monetary factors on headline inflation is diminishing. Core inflation is continuing its downward trend, reaching 6.3 percent in May. Services component of core inflation has decreased slightly since the beginning of the year and amounted to 8.8 percent per annum.
The stable components of inflation continue to decline, indicating that the slowdown in core inflation is becoming more broad-based. In particular, price growth in more than 70 percent of goods and services in the CPI basket slowed down compared to last year.
In April, inflation expectations of households and businesses rose to 14.0 and 13.3 percent, respectively, amid discussions about energy tariff changes and the cancellation of some tax incentives. In May, households’ expectations remained unchanged at 14.0 percent, while the expectations of business entities fell to 12.7 percent. The impact of tariff changes on inflation expectations turns out to be lower than initially projected.
This, in turn, suggests that macroeconomic development indicators and year-end inflation are expected to be within the framework of the baseline scenario forecast.
Leading indicators for January-May, 2024 reveal that economic activity is at a high level.
In particular, in January-May, revenues from trade and paid services increased by 37.4 percent, while the volume of payments of economic agents through banks increased by 36.4 percent compared to the corresponding period of the previous year. The volume of remittances increased by 21 percent, which remains one of the important factors supporting real growth in household incomes.
In January-May, banks provided 102 trillion soums of loans, or 6 percent more than in the corresponding period last year. During this period, time deposits of the population in national currency increased by 21 percent, the number of people with bank accounts increased by 6.1 percent, and the quantity of their accounts increased by 14.8 percent.
Stable growth rates in the services and manufacturing sectors are the main drivers of economic growth. The labor market remains strong amid high investment activity, which is stimulating manufacturing, hence increasing demand for labor.
It is expected that the negative balance of external trade will shrink slightly amid high prices for major export goods in international markets and moderation of demand for imports.
Due to the increase in the foreign currency inflow in the economy through various channels and the stabilization of demand for it, coupled with the change in domestic inflation in May, the real effective exchange rate is expected to strengthen.
An increase in the share of secured transactions in the interbank money market helps to reduce the credit risk and hence the interest rates. The growth of retail loans is normalized by the stabilization of the liquidity situation of the banking sector and the impact of macro-prudential measures.
Maintaining monetary conditions at current levels will help to stimulate savings in the national currency and ensure that core inflation follows its downward trajectory without negatively affecting economic growth.
At the same time, appropriate corrections will be made to the monetary policy measures based on the external economic situation evolving amid increasing uncertainties related to the main trade partners.
The Central Bank pays special attention to the balance of supply and demand in the economy, as well as the inflation expectations while implementing a relatively tight monetary policy aimed at achieving the inflation target of 5 percent.
The next meeting of the central bank’s board to review the policy rate is scheduled for July 25, 2024.