In recent months, against the backdrop of sustained high demand and upward price pressures in the economy, inflation has been declining at a slower pace than forecasted, while inflation expectations remain elevated. At the end of the year, headline inflation is expected to be near the upper limit of the projected range.
In order to reducе inflationary processes and expectations, as well as achieving the medium-term inflation target of 5 percent, the current tightness of monetary policy stance has been maintained.
Over the past two months, annual inflation has slightly decreased, reaching 10 percent by the end of November. This decline in inflation was primarily driven by the stabilization of food prices. However, high consumption and investment activity in the economy continue to support aggregate demand, keeping risks of price increases in services and non-food goods elevated.
Changes in certain primary expenses of households and the secondary effects of energy price liberalization due to colder weather are also reflected in the inflation expectations of economic agents. In November, inflation expectations of households and businesses accelerated to 13.7 percent and 12.7 percent, respectively.
Over the past four months, core inflation has remained relatively steady at around 7.0 percent. In addition, relatively high inflation rate in core non-food goods and services, along with increasing revenues in retail and service sectors, indicate persistent impact of demand-side factors in the economy.
Additionally, the stable growth of aggregate demand and activity in the labor market suggest that current inflationary pressures may persist for a longer period. Rising wages and increasing cross-border remittances are boosting real household incomes. Combined with high investment activity, these factors are expected to continue supporting aggregate demand in the coming months.
As a result, GDP growth is expected to demonstrate stable trends in the second half of 2024, forming around 6–6.5 percent by year-end.
In the context of rising real incomes, effectively managing inflationary processes in the economy requires maintaining a balance between aggregate demand and supply, which, in turn, necessitates keeping the tightness of monetary policy at its current level.
Money market interest rates and yields on government securities reflect the continued relatively tight monetary conditions. High real interest rates in the banking system are further increasing saving activity of the population. Moderation of credit growth and higher deposit growth will allow to balance aggregate demand and mitigate monetary effects on inflation.
Taking these factors into account and aiming to ensure medium-term price stability, the Central Bank's Board has decided to keep the policy rate unchanged at 13.5 percent per annum.
In the medium term, the Central Bank will continue maintaining relatively tight monetary conditions aimed at achieving the 5 percent inflation target. Special attention will be paid to the balance between supply and demand in the economy, inflation expectations, and the pace of structural reforms.
The Central Bank may consider raising the policy rate in case the current high demand and upward pressure on prices in the economy intensify in the coming quarters.
The next meeting of the Central Bank’s Board to review the policy rate is scheduled for January 23, 2025.