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At a meeting on October 21, 2021, the Board of the Central Bank decided to keep the policy rate unchanged

Update date:  21 Oct 2021, 16:14
21 Oct 2021

The policy rate of the Central Bank was left unchanged at the level of 14% per annum, in order to reduce the inflation rate to 10% by the end of the year, given the persistence of factors that increase prices in the economy and uncertainties associated with the degree of their influence, as well as achieving a 5% inflation target in a medium-term.

Economic activity and aggregate demand. Since the beginning of the year, there have been positive trends in the dynamics of domestic and external aggregate demand due to increased economic activity and an improvement in the situation with the pandemic.

In particular, for 9 months of 2021, real GDP growth amounted to 6.9%. At the same time, compared to the same period of last year, the volume of industrial production increased by 9%, agriculture - by 4.2%, construction - by 4.5% and capital investments - by 5%. During this period, the income of the population in real terms increased by 10.4%.

At the same time, the recovery of economic activity in some sectors of the economy to the pre-pandemic level will take a longer period of time. Domestic and foreign tourism, transport, car production (decreased by 32.4% compared to 9 months of last year) have not yet reached the level of 2019. Full recovery of economic processes in these sectors in the future will be a supporting factor for high rates of economic growth.

The main factors behind the recovery in consumer demand in the economy during the year were financial incentives, the recovery of economic processes in the private sector and the growth of external economic relations in the context of the stabilization of the situation in the main trading partners. Retail turnover, reflecting the state of consumer demand, increased in real terms by 9.8% for 9 months of 2021.

In turn, the volume of production of consumer goods in January-September 2021 increased by 10.9%, food products - by 18.3% and non-food products - by 6.9%.

The volume of loans provided by commercial banks to the economy increased by 33% for 9 months compared to the same period of last year and reached 119.5 trillion sums. At the same time, the number of car loans given to the individuals increased by 1.6 times, microloans – 1.7 times and microloans – 2.3 times.

This, in turn, served as an important channel for supporting consumer and investment demand. At the end of the current year, the growth of credit investments is expected to be proportional to the growth of nominal GDP in the range of 16-18%.

External economic conditions. Over the past period of this year, the global economic environment has seen an acceleration of inflationary processes in the context of the backdrop of a significant increase in prices for basic food products and energy resources, as well as measures in the form of tightening monetary conditions in most developing countries.

Also, the high rates of recovery in aggregate demand in the world lead to a significant increase in prices on the international energy market.

For 9 months of 2021, the volume of exports (excluding gold exports) increased by 34% over the same period of last year. In the context of accelerating economic activity and a full resumption of production processes in key sectors of the economy, the volume of imports in January-September of this year increased by 18.7% compared to the corresponding period last year and reached the pre-pandemic level.

Moreover, the volume of cross-border remittances to the country in 9 months of 2021 amounted to $5.7 billion, increasing by 34.2% compared to the corresponding period of 2020 ($4.3 billion) and by 29% compared to the corresponding period of 2019 ($4.5 billion).

The exchange rates of the national currencies of the main trading partners (with the exception of Turkey) have not changed significantly since the beginning of the year, and did not cause a gap in the real effective exchange rate.

Inflation and inflation expectations. At the end of September 2021, annual inflation amounted to 10.8%, which is slightly higher than the forecast in the baseline scenario.

During the current year, the growth in food prices was one of the main factors of headline inflation and with an increasing contribution of 6.1 percentage points.

The annual growth rates of prices in the groups of non-food products and services, consisting of components with stable dynamics, in September amounted to 7.7% and 8.8% per annum, respectively, which contributed to a slowdown in overall inflation.

The level of core inflation, which is sensitive to monetary factors, has been forming below the overall level of inflation since June and amounted to 9.2%, having decreased by 3 percentage points since the beginning of the year.

The inflationary expectations of the population for the next 12 months in September fell to 15.8%, and of business entities – to 14.7%. However, they still remain above the headline inflation, as in many other countries.

This is primarily due to the high growth rates of prices for food products and energy resources. At the end of September, prices for food products increased by 14.4% in annual terms, for energy prices - by 23.2%. The rise in prices in these groups of goods is the main factor that has a negative impact on the downward trend in headline inflation.

Monetary conditions. As a result of a number of changes introduced by the Central Bank to the monetary policy instruments and related operational measures, the weighted average interest rates in the money market, after a significant decrease in May-July, amounted to 13.0% in August, and 13.3% in September, approached the main rate of the Central Bank within the limits of the interest rate corridor.

At the same time, due to the expansion of the interest rate corridor, an increase in the activity of banks in the money market was observed. In particular, transactions were carried out in the amount of 8.4 trillion sums in August and 7.6 trillion sums in September (increased by 46.6% and 31.3%, respectively compared to July).

At the end of September, the average interest rate of household term deposits amounted to 20.3%, legal entities – to 15.3%, and a 6-8% level of real interest rate is formed. Real interest rates calculated on the basis of inflationary expectations of the population also remain positive, at the level of 3-4%.

In turn, this contributed to the growth of total time deposits in the national currency by 29.5% over the past 9 months of this year, including the increase of time deposits of individuals in the national currency by 51%.

Due to high economic activity and demand, interest rates on loans increased slightly compared to the beginning of the year. At the same time, the weighted average interest rate on loans to individuals in September amounted to 21.4%, and on loans to legal entities - 21.1%.

Forecast and risks. The transition of headline inflation to a declining trend, the formation of core inflation within the forecasts, and the persistence of the current moderately tight monetary conditions will be factors contributing to the achievement of the 10% inflation target by the end of the year.

Maintaining the growth of loans allocated to the economy within the growth rates of the nominal GDP will not put additional pressure on the domestic prices and the exchange rate of the national currency in the coming months.

The measures taken by the government to stabilize the prices of basic food products will minimize the impact of price increases in foreign markets on the level of prices in the domestic market.

The Central Bank will continue to study inflationary factors and risks under the influence of external and internal economic conditions and take appropriate measures to eliminate them.

The next Board meeting of the Central Bank to consider the main policy rate is scheduled for December 9, 2021. A press release will be issued following the meeting.

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