The impact of fundamental monetary factors on inflationary processes in the economy is gradually diminishing. In addition, the liberalization of certain regulated prices starting May 1 this year will probably have a one-time effect on headline inflation.
Considering the relatively tight monetary conditions in relation to the upper bound of the updated inflation forecast corridor, the Board of the Central Bank decided to keep the policy rate unchanged at 14 percent per annum.
Headline inflation has been further declining since the beginning of the year, amounting to 8 percent year-on-year in March, with a substantial decrease in the food component. The price dynamics in external food markets have had a downward effect on imported inflation.
Due to continuing stronger demand and recent increases in certain regulated prices and tariffs, services inflation has been further rising in recent months.
Annual core inflation is decelerating, amounting to 7.6 percent in March, with the tendency developing lower than headline inflation since the start of this year.
The inflation expectations of households and businesses remain higher than the actual and projected inflation rates. Furthermore, the adjustments in regulated prices and the imposition of VAT on certain goods and services from April may lead to an increase in inflation expectations.
According to the updated macroeconomic forecasts, taking the above-mentioned factors into account, the headline inflation projection for 2024 under the baseline scenario has been revised upward to 9-11 percent.
The wider range of the forecast corridor is attributed to the difficulty of assessing the effects of tariff increases on the inflation expectations of households and businesses given mitigating measures such as lump-sum payments to the population due to tariff increases, as well as the social norm and the two-month grace period.
There are strong expectations for core inflation to remain on a steady downward trajectory. Core inflation is projected to amount to 7-8 percent by the end of the year.
The revision of the headline inflation forecast reflects a higher increase in regulated prices than initially anticipated in the macroeconomic forecasts presented in the Monetary Policy Guidelines. However, these changes, which have a one-time effect on prices in the economy, will reduce consumer demand to a certain degree and will not significantly affect the downward trend of inflation in the medium term.
Additional government measures aimed at increasing aggregate supply and reducing inflation, as well as the cumulative effects of prolonged relatively tight monetary conditions, will help curb inflation.
According to preliminary data, economic growth accelerated to 6.2 percent in the first quarter of 2024, with high growth rates observed in the services, retail, and construction sectors, as well as increased investment activity in manufacturing and mining industries.
Demand for labor is significantly increasing. However, there is some segmentation in the supply of labor, with pent-up demand in high skilled sectors. Therefore, there is a higher wage growth in these sectors.
The real exchange rate of the national currency has depreciated by 0.9 percent since the beginning of the year, in line with its long-term trend. Considering the exchange rate and inflation forecasts in trading partners, no pressures on the real exchange rate is expected.
According to the updated forecasts, GDP growth is expected to range between 5.2 and 5.7 percent by the end of the year.
The revision of the economic growth forecast is associated with a relatively moderate consumer demand in the future due to structural changes in the expenditures of the population and business entities.
High activity in private investments, fiscal incentives, and the growing dynamics of household incomes, as in previous years, will continue to support the economic growth during this year.
The current tightness of the monetary conditions is resulting in a gradual moderation of credit growth rates and an acceleration of deposit growth through ensuring positive real interest rates in the economy.
In the coming quarters, the banking system's overall liquidity is expected to gradually shift from a structural surplus to a structural deficit, and these structural changes will be adjusted through monetary operations.
According to estimates, at the upper bound of the inflation forecast, monetary conditions will still continue mitigating the impact of monetary factors on inflation and stimulating savings in the national currency.
Meanwhile, should inflation expectations of the population increase significantly in the coming periods, appropriate measures will be taken to adjust monetary conditions.
The Central Bank will place particular emphasis on the balance of supply and demand in the economy, inflation expectations and the pace of structural reforms while implementing a moderately tight monetary policy aimed at achieving the 5 percent inflation target.
The next meeting of the Central Bank Board to review the policy rate is scheduled for June 13, 2024.
