Inflation continues to decelerate in the economy under the influence of fundamental and seasonal factors. If current trends persist until the end of the year, the risks of a sharp acceleration of inflation are low.
Transition of core inflation and inflation expectations to a steady downward trajectory strengthens the possibility of reducing the policy rate while maintaining moderately tight monetary conditions in the future.
In May this year, headline inflation slowed to 10.4% year-on-year. However, core inflation declined more slowly and amounted to 12.4%.
Easing of broad-based inflationary processes served to reduce the share of goods and services with price increases of more than 10% in the consumer basket to 50%. Meanwhile, this figure is still above the 30-40% share in 2020-2021.
Fading out of last year's high base effects, seasonal factors, and regulated prices remaining almost unchanged, as well as the relatively stable exchange rate of the national currency, were the main contributors to a slowdown in inflation.
In the meantime, there is a gradual downward trend in the persistant components of inflation.
Inflation expectations of the population for the next 12 months continued their descending trend, having decreased to 13.7% in May. Comparative stabilization of the economic situation was correspondingly reflected in a decrease in the expectations of businesses to 13.5%.
Alternative indicators of economic activity in April-May of this year kept growing and were above the long-term trend. Volumes of interbank transactions and revenues from trade and paid services increased by 1.6 and 1.4 times, respectively, as compared to the same period of the previous year, which indicates a high level of consumer activity in the economy.
Despite global inflation slowing, largely owing to subsiding effects of last year's upward pressure from world energy and commodity prices, formation of inflation above the target and ongoing upward risks in the service sector are causing global financial conditions to be tightened.
Since the second half of last year, the UZONIA rate and the weighted average interest rates in the interbank money market have been forming within the interest rate corridor, at around 13.5%. Interest rates in the longer-term segments of the money market showed a relatively upward trend amid lower structural liquidity surplus.
In May this year, the weighted average interest rates on term deposits of individuals and legal entities in the national currency amounted to 20.8% and 17%, respectively, resulting in an increase in the total amount of term deposits by 1.5 times, including household deposits by 1.6 times, compared to the previous year.
The weighted average interest rates on loans in the national currency decreased slightly in May to 22.8%. Meanwhile, the growth of lending was mainly driven by an increase in retail loans. As of May the balance of retail loans rose 1.5 times compared with the corresponding period of the previous year.
Under the baseline scenario of macroeconomic development, inflation is expected to fall to 8.5-9.5% by the end of 2023, given disinflationary factors prevailing over pro-inflationary ones.
Maintenance of moderately tight monetary conditions and mitigation of the external impact on prices are considered as factors curbing inflation.
Fiscal expansion and its role in stimulating the economy is expected to remain strong this year. In the context of looser fiscal conditions and high credit growth, the easing of monetary conditions may put additional pressure on prices.
Also, despite the decline in headline inflation in recent months, high price increases for some food products and services require current monetary conditions to be maintained.
A stable downward trajectory of core inflation and inflation expectations may allow for a reduction in the policy rate, while maintaining moderately tight monetary conditions in the economy.
The Central Bank will continue to thoroughly assess the impact of monetary conditions on aggregate demand, prices and inflation expectations. Measures to be taken will be aimed at forming inflation within the projected corridor.
The next meeting of the Central Bank Board to review the policy rate is scheduled for July 27, 2023.
