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The Central Bank of Uzbekistan decided to keep the policy rate unchanged, at 14% per annum on July 29, 2021 Board’s meeting

Update date:  30 Jul 2021, 16:37
29 Jul 2021

For to achieve the forecasted inflation parameters by the end of this year and maintain the balance between economic activity in the face of inflationary pressures and the aggravated pandemic situation, the Central Bank has left the policy rate unchanged at 14% and expanded the interest rate corridor to +/- 2 percentage points.

Faster than expected economic activity revival and aggregate demand growth, significant financial resources poured into the economy, risks associated with high inflation expectations and food supply issues require from the Central Bank to keep the current monetary conditions with some corrections to the monetary policy toolkit.

Economic activity and aggregate demand. An acceleration of economic activity has continued in the 2-nd quarter of this year, and in many sectors of economy growth rates reached pre-pandemic levels.

In the first half of 2021, the real GDP has grown by 6.2% relative to the same period of 2020. Such high figures can be explained by low base effect, and by the boosting of aggregate demand through fiscal impulse and loans to the economy.

The industrial production and services growth rates (8.5% and 18.3%, respectively) have reached their pre-pandemic values while agriculture (1.8%) and construction (0.1%) did not demonstrate significant growth this year due to already high rates in 2020. More positive figures in these sectors are expected in the second half of the 2021.

The demand growth in the economy is captured by boosted consumer goods production - by 7.7%, and retail sales growth - by 9% compared to the same period of last year.

The investments demand was mainly driven by commercial banks’ loans and foreign credit lines. The volume of private investments in fixed assets increased by 15% in the first half of the year compared to the same period last year.

In total, commercial banks have issued 1.4 times more loans in January-June this year compared to the same period previous year. Over 6 months the volume loan stock in the economy have risen by 8.7% relative to the beginning of the year.

Increased wages in the public sector in February, improvements in the private sector activity due to relatively stable epidemiological situation in the first 6 months of 2021 have all contributed to the recovery of people’ incomes. The real income increased by 10.8% in the first half of the year, which has become one of the key factors of activated consumer demand.

The volume of revenues from export and cross-border remittances increased by 1.4 times compared to the corresponding period of last year.

External inflation conditions remain heightened. Since the beginning of 2021 the inflation in key trading partners except for China stays high and overshoots central banks’ targets. This makes them rise corresponding policy rates and tighten monetary conditions.

Inflation and inflation expectations. Over last four-five months the annual inflation rate has been formulating without any significant changes and has stood at 10.9% level by the end of June, 2021, as in May.

End of June annual growth in food prices was 14.7%, making it the main contributor to overall inflation. It is worth to note, that there was no seasonal decrease in fruits and vegetables prices as it was previously expected for May-July.

Rising dynamics for food prices is mainly explained by supply factors: production volumes, weather conditions, level of productivity.  

More stable components of inflation – non-foods and services rose in June by 8.2% and 8.1% per annum, respectively, contributing to the slowdown in overall inflation.

Core inflation – inflation netted for seasonal fluctuations in prices on fruits and vegetables, and administratively regulated prices, fell in June to 10.2%.

Inflation expectations of individuals for the next 12 months have pinned at 16.3% in June, which is 0.8 p.p. higher than in March. The future dynamics of expectations will predominantely depend on food prices, and stabilization of exchange rate.

Monetary conditions. Due to rapid increase in volumes of funds directed to the economy a structural liquidity surplus has built up over the 2-nd quarter of 2021. This has produced loose conditions in the interbank money market. In June, the weighted average interbank interest rate fell to 11%.

The increase in overall liquidity has led to a significant decline in commercial banks’ activity in the money market. In particular, in the 2-nd quarter of 2021, the average monthly volume of transactions decreased by 1.4 times relative to the 1-st quarter.

Despite the decline in the interest rates on short-term money market, the situation with long-term money resources remains stable.

In particular, there was no significant change in interest rates on local currency deposits in June compared to May. Weighted average interest rates on local currency deposits of individuals are 19.5%, those of legal entities – 15.8%.

Given the fact that the real interest rates on deposits in national currency remain positive and given the current exchange rate stance, time deposits in national currency continued to grow in June. Since the beginning of 2021, total time deposits in national currency increased by 24.3%, in particular, out of which time deposits of individuals – by 33.3%.

Interest rates on loans has grown slightly compared to the beginning of the year. The average interest rate on loans to individuals comprised 22.2%, on loans to legal entities - 20.8%.

In the condition of 9-10% real interest rates on loans and high economic and investment activity the increase of the policy rate may further boost real interest rates in the economy.

As was mentioned in the previous Central Bank’s Board meeting, despite increased volumes of short-term liquidity regulation operations in the banking system, abnormal distribution of funds into the economy from centralized sources has made money market rates go beyond the interest rate corridor. This, in turn has required the Central Bank to make appropriate adjustments to its monetary policy instruments.

Thus, effective from August 1, 2021:

the interest rate corridor’s width is set at +/-2 percentage points, meaning that the Central Bank provides short-term resources to banks at 16% and absorbs them at 12%;

overnight deposit operations with the Central Bank are limitless and standby;

the averaging ratio coefficient on required reserves increases from 0.75 to 0.8;

reserve requirements on foreign currency deposits of commercial banks raises from 14% to 18%;

Changes in reserves requirements is intended to reduce the degree of dollarization in the economy.

The Central Bank constantly monitors the situation in the money market and takes all necessary measures to ensure that money market rates are within the interest rate corridor, close to the policy rate.

Forecasts and risks. Given external and internal economic conditions of the first half of the year the forecasts have been revised for the end of 2021.

The projected real GDP growth for 2021 is raised to 5.8-6.8% (initially 4.5-5.5%). Such high growth rates come from faster than expected economic activity driven by fiscal stimulus. The fixed capital formation growth will recover and negative output gap will narrow down by the end of the year.

The forecast on the year end inflation is left unchanged and stays at
9-10%. This forecast will be achieved by providing relatively tight monetary conditions, expected changes to monetary policy instruments, stable exchange rate of domestic currency, boosting of reforms by relevant ministries are to reduce the impact of non-monetary factors on inflation.

         Given rapid economic recovery and aggregate demand revival, the additional financial incentives may put pressure on prices, as the supply needs certain time in order to meet the demand.

High inflation and inflation expectations in the economy as well as high sensitivity to changes in prices on basic food staffs may exacerbate the situation.

Given the pandemic influence it is critical to take measures on preventing hikes in prices on medicines, healthcare services and basic food staffs and to reduce the impact of quarantine restrictions on public catering, transportation, delivery services.

Despite increased imports of meat products and cattle, restraining the growing price dynamics in this market requires systematic efforts on creating stable supply chains by increasing necessary fodder base for the livestock and expanding domestic production.

In addition, the effective use of funds directed into the economy will minimize the monetary impact on prices.

The Central Bank will closely screen the inflationary processes, factors, potential risks coming from external and internal conditions and will take appropriate measures to eliminate them.

The next Central Bank’s Board meeting on policy rate will take place on September 9, 2021. A corresponding press-release will follow the meeting.


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