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At the meeting on May 4, 2023, the Board of the Central Bank decided to keep the policy rate unchanged at 14 percent per annum

Update date:  4 May 2023, 12:03

This decision is aimed at ensuring monetary conditions conducive to a further slowdown in price growth in the economy, as well as maintaining the positive impact of the policy rate reduction in March on the balancing of aggregate supply and demand.

The annual inflation rate continued to decline in March and April and amounted to 11.7 percent and 11.0 percent, respectively. Seasonal factors and the high base effect of the previous year also played an important role in this decrease.

Core inflation representing the long-term and stable factors of inflation, also showed significant downward dynamics in March and slowed down to 12.9% annually (13.8% in December 2022). In doing so, the contribution of core inflation to headline inflation was less than 10 percentage points for the first time since October last year.

At present, the core inflation being higher than the headline inflation implies that some inflationary risks still persist in the economy.

Inflation expectations of the households and business entities for the next 12 months also returned to the downward trend and formed at the level of 14.4 and 14.1 percent, respectively. Meanwhile, the median of answers regarding the inflation expectations decreased to 11.5% for the households and to 11.4% for business entities.

In January of this year, inflation expectations in the economy rose sharply, reflecting increased concerns of the population and business entities regarding the economic situation and prices. A decline in expectations and their formation close to the long-term trend supports the assumption that the general trend of slowing inflationary processes will persist in the future.

Tightening external financial conditions have started to be reflected in increased volatility in global and regional financial markets.

Despite prompt responses to risks arising in the international banking system, tight lending conditions and uncertainty about future risks are projected to persist through the end of the year.

The high level of remittances in the past year, an increase in budget expenditures this year, including wages and pensions, are the main factors supporting consumer demand. This, in turn, will serve to ensure high economic activity in the coming quarters.

Relatively tight monetary conditions have been maintained in the money market. In January-April, the UZONIA index was formed fully within the interest rate corridor, being around 13% after the reduction of the policy rate.

The growth of the deposit base of commercial banks has accelerated. At the end of April, the stock of term deposits in national currency increased by 1.5 times compared to the same period last year.

The growth of loans to the economy has accelerated, mainly due to loans allocated in national currency. The main factors of a 1.3 times increase in the volume of loans issued by commercial banks in January-April was the rapid increase in car loans, micro-loans and consumer loans to households.

These trends, in turn, were reflected in a decrease of the dollarization in the economy, and the level of dollarization of deposits and loans declined to 30.6% and 44.3%, respectively.

According to updated economic forecasts, global economic growth is expected to slow down in the second half of 2023. Global inflation will continue to decline more slowly than expected.

Currently, there is steady growth dynamics in prices of the service sector. Core inflation remains high in most countries, raising the probability that global financial conditions will remain tight for longer periods of time.

Uncertainties regarding prices of major export goods are increasing in conditions of high volatility in the world commodity markets.

Taking into account a sharp increase in the volume of bank loans to the individuals may create risks for financial and macroeconomic stability by increasing the debt burden, the Central Bank will apply macroprudential measures in order to balance the growth of loans.

Preliminary results of the first quarter of this year denote that most indicators in the economy are forming within the baseline scenario of macroeconomic development.

According to the updated forecasts, the real GDP growth by the end of 2023 is expected to be higher than the initial forecasts.

The forecast range of year-end inflation rate was left unchanged at 8.5-9.5 percent. Dynamics of inflation expectations, relatively tight conditions in the money market, stabilized supply of basic products, increase confidence in the formation of inflation in the middle of this forecast corridor.

The central bank will continue to assess the impact of monetary conditions on aggregate demand, price level and inflation expectations. In this case, decisions taken will be focused on ensuring the formation of inflation within the forecast corridor.

The next meeting of the Central Bank Board to review the policy rate is scheduled for June 15, 2023.


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