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At the meeting on October 26, 2023, the Board of the Central Bank conceptually approved the "Monetary Policy Guidelines for the period of 2024 and 2025-2026"

Update date:  26 Oct 2023, 13:03
26 Oct 2023

The Monetary Policy Guidelines include measures to respond to changes in external and internal economic conditions in the coming years, development of an operational framework and research on interconnections in the economy. They generally represent the views of the Central bank on the current and expected macroeconomic situation.

Considering the economic situation in foreign trade partners, the prevalence of high uncertainties in the commodity and financial markets in the future, as well as the implementation pace of structural reforms, the guidelines for macroeconomic development for the upcoming years were developed on a scenario basis.

The main goal of the central bank in all scenarios of macroeconomic development is to ensure price and financial stability.

While the developments of the current external conditions without drastic changes as well as active continuation of structural reforms were established as the conditions of the baseline scenario, further intensification of uncertainties and the emergence of extreme shocks in external conditions were noted as assumptions for alternative scenario.

When developing the baseline scenario, the implementation of macroeconomic adjustments in the following years was envisaged, i.e. the transition of structural reforms in the energy, transport, agriculture and water sectors to an active phase and the logical completion of some of them, the beginning of fiscal consolidation and reduction of the overall fiscal deficit compared to 2023, and the reduction of the state's share in the economy. As a result, high growth rates of private investment and exports are expected.

According to the revised projections under this scenario, reaching the 5 percent constant inflation target occurs in the second half of 2025, taking into account the impact of adjustments in some regulated prices on general inflation, as well as the longer persistence of external supply-side pressures in 2022-2023.

Meanwhile, this decision does not mean that the permanent target of 5 percent has been changed, but indicates that the period for reaching this target has been extended.

In addition, the extension of the target, on the one hand, is linked to the fact that gross supply in the economy lags behind and does not match domestic consumer demand, while on the other hand, economic activity and financial stability may be threatened by serious risks in case of taking decisive measures aimed at limiting gross demand.

This, in turn, means that in order to effectively reduce inflation to its target, it is necessary to further strengthen measures aimed at increasing gross supply, while reducing the impact of its monetary factors.

Under the baseline scenario of macroeconomic development, inflation is projected at around 8-9 percent in 2024. Monetary conditions will continue to be maintained at a relatively tight level in 2024 in order to keep the inflation within forecast range.

The inflation forecast may be revised to reflect the level of adjustment of administered prices in 2024, in turn allowing for corresponding changes in monetary conditions.

Given that the short-term incremental impact on overall inflation will be significant during the period of macroeconomic adjustment and structural reforms, monetary policy decisions next year will primarily focus on reducing core inflation.

On the other hand, a sufficient basis for maintaining the downward trend in core inflation will be formed in the coming years.

In the event that expected changes have a sharp impact on inflation expectations, monetary conditions will be modified and each measure will be communicated in detail to the public.

In order to improve the effectiveness of monetary policy, measures aimed at reducing the level of dollarization in the banking system, minimizing the practice of preferential lending, and shifting to interest rates formed on the basis of market principles will be carried on.

In the medium term, the dynamics of overall liquidity of the banking system will be formed on the basis of government operations and sources of their financing, the balance of supply and demand in the domestic foreign exchange market. At the same time, the trend of liquidity reduction observed in 2023 will continue in 2024 as well and contribute to the tight monetary conditions through its inflation-constraining feature.

In the context of declining liquidity in the banking system, the issue of financial stability may be put on the agenda and the Central Bank will consider measures through active use of liquidity management tools to ensure the sustainability of the system.

Under the baseline scenario, real growth of GDP is expected to be at 5-5.7% in 2024, around 5-6% in 2025, and about 5.5-6.5% in 2026.

The factors supporting economic growth are expected to be an increase in the investment and production potential of the private sector, high growth rates of foreign and domestic direct investment, as well as exports.

Under the conditions of the alternative scenario, the expected inflation rate in 2024 will be 9-10%, taking into account the additional pressure on domestic prices stemming from a relatively unfavorable development of external conditions compared to the baseline scenario.

In the meantime, the period of achieving the permanent target will be delayed, and inflation will reach about 7-8% in 2025 and decline to 5% by the end of 2026.

In this scenario, fiscal stimulus will be the main factor supporting economic activity. At the same time, in the medium term, real GDP growth might be 1.5-2 percentage points below the forecasts in the baseline scenario.

If the conditions of the alternative scenario are realized, measures will be taken to further tighten monetary conditions.

Macroprudential measures will be widely applied to ensure financial stability.

In the coming years, institutional development will be carried out in the following directions:

with regard to the development of the operational mechanism of monetary policy, announcing a conditional forecast of the policy rate from 2025 on and its discussion with market participants will be worked out in detail;

measures will be taken to expand the volume of repo operations conducted in the money market and to form a yield curve based on the price of money at different maturities;

overnight interest rate swaps and the corresponding yield curve will be introduced;

to further improve the macroeconomic analysis and forecasting system, e-cpi forecasts will be developed based on the results of machine learning and online observations;

methods of survey coverage of inflation expectations, as well as the study of consumer and business sentiment will be improved;

the range of models used in forecasting economic growth and inflation will be expanded;

communication tools will be improved to match the interests and needs of the target audience as part of developing overall monetary policy communication;

directions for the development of multi-layer communication will be elaborated;

communication rules will be developed and their implementation will be ensured.

The conceptually approved preliminary draft of the "Monetary Policy Guidelines for 2024 and the period of 2025-2026" will be published on the official pages of the Central Bank for public discussion.

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