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The Central Bank Board decided to leave the policy rate unchanged on June 10, 2021

Update date:  10 Jun 2021, 19:36
10 Jun 2021

The decision was made in order to maintain the balance between achieving the inflation forecast and supporting the economy in conditions of  recovery of economic and investment activities in the countrу, given the declining trend of core inflation, while remaining high rates of growth in some groups of goods,

Inflation and inflation expectations. In May 2021, the annual inflation rate was 10.9 percent, growing slightly than in April (10.7 percent). The acceleration of price growth in food products from 13.6 percent to 14.4 percent in April was one of the main driving factors of inflation.

The change in prices for this group of goods was caused by, on the one hand, a significant increase in prices for seed oil, sugar and meat products on the world market, and, on the other hand, by harvest delays and expected shortage in supply of fruit and vegetable harvests due to changing weather conditions in winter and spring.

The annual increase in non-food prices and tariffs for services had a reducing effect on overall inflation, reaching 8.2 and 8.5 percent, respectively in May this year.

The core inflation rate that is calculated through excluding prices for regulated prices and fruits and vegetables, which are highly sensitive to seasonal factors, has been gradually declining since the beginning of the year (12.1 percent), reaching 10.9 percent per annum in May and equaling overall inflation rates.

Inflation expectations and perceived inflation. Inflation expectations and perceived inflation indicators showed an upward trend in April as a result of a sharp rise in prices for oil products and other basic food products in March-April.

In May, inflation expectations of the households and business entities decreased compared to April, reached 16.4 and 16.5 percent, respectively, but still they are significantly higher than actual inflation.

The downward trend was also observed in the perceived inflation rate, where the perceived inflation of the households in May was 17.2 percent, while business entities fell to 16.8 percent.

The decline in inflation expectations by the end of the year will be primarily due to the stabilization of prices for basic food products and the balance of aggregate consumption and supply in the economy.

Internal economic conditions. In January-April, the volume of industrial production increased by 6.6 percent compared to the same period of previous year, while the volume of services provided increased by 19.8 percent. Overall, growth rates in these sectors accelerated relative to growth rates in the first quarter.

As the consuming activity of the population increases in the economy, the volume of trade and paid services is also increasing. In January-May, the volume of receipts from trade and paid services in commercial banks amounted to 19.6 trln. sum, which is significantly higher than in 2019-2020 (11 and 6.1 trln. sum, respectively).

By the end of the year, fiscal stimulus is expected to be a key driver of economic growth and investment activity. The fact that the overall fiscal deficit is forecasted higher than last year, and the increase in social benefits, pensions and wages will lead to a significant increase in demand for consumption in the economy.

External economic conditions. In the first five months of this year, external economic conditions have been moderate for our economy. The exchange rates of the national currencies of the major trading partners (excluding Turkey) have not changed significantly since the beginning of the year.

According to the International Monetary Fund's forecasts updated in April, GDP growth rates in major trading partners – Russia, China and Kazakhstan – have changed to positive side.

Although the price of gold in world commodity markets had a downward trend in February-March, it recovered again in April-May and approached the figures at the beginning of the year in June. Copper prices, on the other hand, have been growing with some volatility since the beginning of the year.

In January-May this year, export revenues amounted to 3.9 bln. dollars (excluding gold and gas), which is 1.5 times higher than in the corresponding period of 2020 ($2.5 bln.) and 39 percent higher than in 2019 ($2.8 bln.).

The volume of cross-border remittances to Uzbekistan in 5 months amounted to 2.6 bln. dollars. It increased by 43 percent compared to the corresponding period of 2020 ($1.8 bln.) and by 30 percent compared to the corresponding period of 2019 ($2 bln.) and serves as a factor supporting the consumption and investment activity of the population.

These factors, in turn, played an important role in the stability of supply in the domestic foreign exchange market and the formation of the exchange rate of local currency. During the first five months of the year, the exchange rate of sum fluctuated in the range of 10455-10610 sum/USD.

Monetary conditions. Money market interest rates have been declining over the past two months in condition of rising liquidity in the banking system. In May, the weighted average interest rates in the money market and the Uzonia index fell below the lower bound of the Central Bank's interest rate corridor.

There was a negative difference of -2 percentage points in May between interest rates in the money market and the policy rate, which required more active use of liquidity instruments.

For this purpose, the Central Bank increased the volume of liquidity-absorbtion operations. Particularly, In April-May, the average monthly deposit auctions increased to 1.6 times relative to the monthly average in the first quarter, the average daily overnight deposits increased to 1,8 times and monthly amounts of issued CBU notes rised 3 times relative to notes were issued in the first quarter of 2021.

As the economy recovers, so does the demand for credit. In the first 5 months of this year, the volume of loans provided by commercial banks amounted to 64.2 trln. sum, which is 13.8 percent more than in the corresponding period of the previous year and 8.2 percent more than in the corresponding period of 2019.

In the first 5 months of 2021, with the recovery of economic activity and the financial situation of business entities reaching pre-pandemic levels, the level of loan repayment increased significantly (up to 70 percent) compared to the same period of last year (56 percent).

In May, the average weighted interest rates on deposits of individuals in the national currency amounted to 19.4 percent, and for legal entities - 15.8 percent.

Given the fact that interest rates on deposits are formed above the level of current inflation and inflation expectations, as well as a relatively stable exchange rate trend, there was a significant increase in time deposits in the national currency. Particularly, in January-May, total time deposits in the national currency increased by 19.6 percent, while time deposits of individuals increased by 27.4 percent.

Uncertainties and risks. In general, the analysis of factors that increase and decrease inflation demonstrates that the weight of factors that increase inflation in recent months is relatively high, and requires to speed up systemic measures to curb inflation.

This requires, first of all, to ensure that the growth rates of loans to the economy at the end of the year are consistent with the growth of nominal GDP and to maintain the positive level (2-3 percent) of real interest rates in the money market.

An increase in the volume of fiscal stimulus in the coming months, a disproportionate change in aggregate supply relative to the growth rates of demand for consumption and investment could lead to certain inflationary pressures.

Also, in the coming months, structural inflation factors will be mainly related to the dynamics of basic food products in world markets, fruit supply, trends in car fuel and in building materials markets.

In turn, the prices of futures contracts for basic food products in world markets for October-November this year are significantly lower than the current prices.

Changing weather conditions (lack of water resources in fields and pastures) observed since the beginning of this year may put increasing pressure on the prices of meat products and vegetables, affecting feed prices and the process of replanting vegetable crops.

Foremost, stimulating competition in consumer markets, expanding the size of markets and trade networks, increasing the production and cultivation of basic food products and allocating the necessary land and water resources for growing these products will have a positive effect in minimizing the impact of the above factors.

In the present situation and the expected economic conditions in the future, the current level of the Central Bank's policy rate is adequate to provide optimal monetary conditions for achieving the inflation forecast in 2021.

The Central Bank will continue to carefully observe the nature of inflation factors and risks under the influence of external and internal conditions.

The next meeting of the Board of the Central Bank to review the policy rate is scheduled for July 22, 2021. A press release will be published following the meeting.


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