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On January 16, 2020, the Board of Governors of the Central Bank decided to keep the policy rate at 16% per annum

Update date:  20 Jan 2020, 09:18
18 Jan 2020

This decision is made due to necessity of building the strong confidence in the downward trend of inflation forecast and existence of some uncertainty in regulated prices’ adjustments.

At the same time, the possibility of slightly cutting policy rate at the upcoming meetings is rising.

Dynamics and forecast of inflation. The annual inflation in 2019 has approached the upper bound of the forecast (13.5-15.5%) and amounted to 15.2%.

The main acceleration has occurred in the second half of the year, as a result of regulated prices liberalization (rise by 21.6%) and more rapid national currency devaluation in August 2019.

In 2019 the significant increase of prices has been observed in flour and bakery (24.8%), meat products (23.4%), fruits and vegetables (14.5%), as well as on passenger transport services (13%).

The quarterly inflation rate has slowed down to 5% in October-December of 2019 compared to 5,7% in the same period of 2018.

The Central Bank keeps baseline inflation forecast for 2020 at 12-13,5%. The prerequisites for the decrease of the inflation rate are based on the following forecasted estimates:

the fading out effects from some inflationary impulses generated in 2019, and forecast of slower growth of prices on foods and nonfoods due to their price adjustments to the Central Asia’s region and to the levels of main trading partners of Uzbekistan;    

the forecasted growth in the agricultural sector production, textile and construction industries will support increase of supply in domestic market. The improvement of competitive environment will be the key factor in facilitating this process;

the provision of moderate credit growth by conducting more prudent monetary and macroprudential policies, optimization of government expenditures and the overall fiscal deficit altogether will insure prevention of excessive demand growth in the economy, thus weakening the pressure on inflation and exchange rate.    

According to the projections households’ nominal income and average level of wages will increase moderately in 2020 after their significant adjustment in 2018-2019, thus it will help minimize the influence of demand factors.

External and internal economic conditions. According to preliminary estimates, GDP growth in 2019 is 5.6%. Despite the slowdown in global economic activity, conditions for the domestic growth remained favorable throughout the year, much due to the loose fiscal and credit policies, and also due to the positive price dynamics on key raw export goods.

According to the forecasts, more rapid growth of credit activity and government expenditures in 2018-2019 will have prolonged positive influence on the economy in the first half of 2020.

It is assumed that over the second half of 2020 the rate of nominal GDP growth will slightly slow down, compared to the corresponding period of 2019. However, despite the constraining impact of fiscal and monetary policies on aggregate demand, the increase in the foreign direct investments and acceleration of investment processes will support the economic growth.

Monetary conditions. In the last quarter of 2019 money market rates have been formed under the influence of various factors and market trends. Their patterns were different from the previous quarters of the year.   

In particular, the weighted-average rates on deposits have risen from 15.2% in October to 16.4% in November and to 17.5% in December 2019. At the same time, the average duration of deposit operations has also increased.

In October-December 2019, the volume of interbank operations has increased more than 2 times relative to the average values in previous quarters.

At the same time, despite the lack of persistent growth in inflation expectations and the forecasted inflation dynamics, the interest rates on deposit operations in the money market with the maturity from 1 to 3 months have risen to 18-20%. This may be the implication of shortage in longer liquidity provision sources and also of the endeavor of banks to adjust the liquidity adequacy indicators in accordance with requirements.

Gradual enrichment of domestic financial market by bonds issued by the Central Bank and the Ministry of Finance along with the liquidity improvement measures, undertaken by banks, will enable to form the yield curve, consistent with the forecasted inflation path.

It is expected that the market unification through the gradual transition to market based mechanisms of credit funds provision will serve to narrow the interest rates’ gaps in the credit market.

The total money supply in 2019 has increased by 13.8%, in national currency – by 14.4%. The positive changes were observed in the structure of money supply, in particular:

time deposits in national currency have grown by 43%, including the individuals’ deposits - by 54%;

the proportion of households’ deposits has grown from 25% to 31% in the total amount of deposits;

cash in circulation has been rising slower than broad money’s growth, at 9.4% pace. The payment systems infrastructure and financial technologies development, as well as gradual strengthening of credibility in the national currency and the banking system, as a whole, began to exert its positive impact. As a result, the share of cash in the total money supply has decreased from 27.6% to 26.6% over the 2019.

The credit to the economy has grown by 54,8 % in 2019. Particularly, loans in national currency have increased by 48.7% (including to households – by 63.5%), lending in foreign currency has increased by 62.8%.

In line with the forecast, the growth rate of credit will return to its fundamental trend or balanced growth corresponding to the nominal GDP growth, and will be in the range of 20-25%.

The assurance of the projected level of credit growth in 2020 and the usage of redeemed credit funds in more effective way will have positive impact on the economy, including the decelerating pace of inflation along with the balance of payments improvement and constraint in excessive demand in 2020.

In the field of macroprudential policies the efforts will be concentrated on the assurance of strict compliance with the established requirements on liquidity, capital adequacy, and the marginal debt burden of the population.

Monetary policy measures will be focused on the improvement of its transmission channels, particularly the credit, savings, inflation expectations and the exchange rate stability channel. The interest rate operations along with the communication tools will take more practical form.

Risks and uncertainties. Some uncertainty remains in services, where costs are largely determined by wages, and utility prices are mainly driven by energy costs.

The uncertainty relates to the regulated prices’ increase. The growing concern over the necessity to solve issues related to the no-break energy supply may require significant price adjustments in 2020. This in turn may be reason of the baseline forecast revision. However, this factor is considered to be the one-time shot with no further proliferations and thus will be taken into account at the next meetings on policy rate revision.

The key factor for persistent inflation deceleration is the conduct of the rational structural policy in the areas of transportation, market competition conditions’ improvement and the uninterrupted power and gas supply to the economy.

The Central bank will continue closely analyze factors and risks of inflation, while forming strong confidence in dynamics of inflation forecast it will take appropriate decisions in cutting the policy rate.

The intermediate Board meeting on Central Bank’s key policy rate is to be held on March 5, 2020. The press-release will be published on 3 PM, Tashkent time.

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