In recent months, headline inflation is declining while inflationary factors in the economy are developing in a multidirectional manner. Although the impact of last year's energy price liberalization on inflation is expected to diminish in the coming quarters, inflation expectations remain high, requiring the maintenance of relatively tight monetary conditions.
The decision is aimed at returning core inflation and inflation expectations to a sustainable downward trend and creating sufficient conditions to achieve the 5 percent target in the medium term.
The headline inflation rate has been on a downward trend since October 2024, reaching 9.8 percent annually in December. This can be seen as an indication of further stabilization of prices. At the end of 2024, price growth in three-quarters of goods and services in the consumer basket slowed down compared to 2023.
Meanwhile, core inflation accelerated slightly in December, reaching 7.2 percent. The relatively high core inflation of services and non-food goods indicate the presence of demand-side factors driving inflation in addition to supply-side factors.
The high level of consumption and investment activity observed in 2023-2024 continues to persist in the economy. In particular, the significant growth in wages and cross-border remittances has contributed to an increase in real household incomes. Against the backdrop of high economic activity, this is expected to continue supporting aggregate demand in the coming months, potentially exerting upward pressure on core inflation.
In November-December 2024, the emergence of seasonal supply factors led to an increase in inflation expectations of households and business entities. In the future, the diminishing impact of these factors, along with relatively tight monetary conditions and the maintenance of macroeconomic stability, is expected to contribute to a decline in inflation expectations.
According to the updated forecasts, headline inflation is expected to be around 7-8 percent at the end of 2025.
In the first half of this year, the primary effects of the liberalization of energy prices in 2024 are expected to taper off, significantly contributing to a reduction in headline inflation at the end of the second quarter. In particular, a temporary increase in headline inflation is anticipated to occur in April due to the one-month shift in the implementation of the next phase of this reform in 2025.
Going forward, the secondary effects of these changes on core inflation will be a key factor in determining the direction of monetary policy conditions.
High economic activity expected in 2025 will support the GDP growth, with forecasts indicating a growth of around 6 percent at the end of the year. The expected increase in private investments will be a factor supporting economic growth, leading to an expansion of supply of goods and services.
At the same time, the risk of rising prices for certain food products in the global market in the coming quarters may have an upward pressure on inflation through import prices.
The appreciation of the real effective exchange rate in the last months of 2024 was short-term in nature and was influenced by the depreciation of certain trading partners' currencies and a higher domestic inflation rate relative to trading partners. By the second half of 2025, as inflation continues to decline, the real effective exchange rate is expected to return to its medium-term trend level.
The domestic currency market in the medium term is expected to remain largely in balance due to the improvement of the current account balance in 2024, the anticipated relative macroeconomic stability in trading partner countries in 2025 and the absence of significant risks from domestic factors affecting the exchange rate.
Money market interest rates and yields on government securities indicate the relative restrictiveness of current monetary conditions. Real interest rates in the economy are increasing the household’s propensity to save.
By maintaining tight monetary conditions, the growth in lending volumes is expected to remain moderate, while the high growth rates of deposits are likely to continue. These factors will help balance aggregate demand and reduce the inflationary impact of monetary factors.
Considering the above factors, the Central Bank's Board has decided to keep the key interest rate unchanged at 13.5 percent to ensure price stability in the medium term.
In the medium term, the Central Bank will ensure that monetary conditions remain sufficiently tight to achieve a stable decline in inflation toward the 5 percent target.
In case of emergence of stronger-than-expected pressures on aggregate demand and prices in the economy in the coming quarters, the level of restrictiveness of monetary conditions may be reconsidered.
The next meeting of the Central Bank’s Board to review the policy rate is scheduled for March 13, 2025.
