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At a meeting on March 17, 2022, the Board of the Central bank decided to raise the policy rate to 17 percent per annum

Update date:  17 Mar 2022, 13:33
17 Mar 2022

Amid high uncertainties and tensions in the external economic environment, in order to ensure macroeconomic and financial stability in the country by preventing the growth of devaluation and inflation expectations, maintaining savings in the national currency and mitigating the impact of external risks on our economy the Central Bank raised the policy rate
to 17
percent per annum.

In this case, the Central Bank will take all necessary measures to prevent a sharp rise in domestic prices, ensure the continuity of the payment system and financial stability.

External economic conditions. The economic situation in the major trading partner countries, sharp fluctuations in their exchange rates, rising prices in world commodity and energy markets are increasing macroeconomic uncertainties and risks.

Surveys conducted among the population and business entities show that there is a significant increase in their devaluation expectations.

Aforementioned factors negatively impact on domestic macroeconomic stability in the short and medium-term through various channels.

Herewith, short-term effects are reflected in the reduction of supply in the domestic foreign exchange market due to reduced export earnings and remittances to the country, changes in domestic prices because of rising prices for imported consumer goods, while medium-term effects put pressure on economic growth through reduced external and domestic demand.

The implementation of measures for 2022-2023 on macroeconomic and structural reforms will help mitigate these negative effects.

In general, the dynamics of the national currency has been adjusted in response to external risks and devaluation pressures, and since the beginning of this year, the sum has depreciated by 6.8 percent against the US dollar.

Given the current situation, in order to prevent sharp fluctuations in the exchange rate and ensure the stable operation of the market the Central Bank increased the volume of interventions in the domestic foreign exchange market in the first half of March this year in accordance with the principles of neutrality.

These interventions are being carried out at the expense of accumulated reserves created last year as a result of favorable conditions in the foreign exchange market.

In the future, in order to ensure stability in the market appropriate interventions will be made and measures will be taken to prevent sharp fluctuations in the national currency. Today’s increase in the policy rate is also aimed at mitigating the short-term adverse effects (shocks) that are occurring.

Domestic price dynamics and inflation expectations. According to observations, in the first half of March in the regions of the country the prices for the main consumer goods increased by 0.6 percent. Meanwhile, food products grew by 0.8 percent, non-food products by 0.4 percent and services by 0.2 percent.

According to the February 2022 survey, the households’ inflation expectations for the next 12 months amounted to 14.0 percent. Inflation expectations of business entities increased by 0.3 percentage points compared to the last month and amounted to 14.6 percent.

Significant increases in prices for basic foodstuffs and energy resources in the world market, decline and geographical changes in foreign supply, logistics issues in imports of consumer goods are likely to put additional pressure on domestic prices by the end of the year.

In this regard, measures will be taken together with the Government to increase the supply of products in the domestic market, address issues related to logistics, meet the demand for consumer goods through alternative import routes and eliminate possible disruptions.

The response actions such as increasing the policy rate and measures to stabilize the foreign exchange market will also help to anchor inflation expectations in the future and maintain the purchasing power of the households’ income in the national currency.

Monetary conditions. In the first two months of 2022, the average interest rate on interbank money market operations was formed around 13.1 percent, which served to ensure a “relatively tight” monetary conditions in the economy.

The average weighted interest rates offered by banks on term deposits in the national currency in February amounted to 20.4 percent for individuals and to 15.5 percent for legal entities, thus forming the positive gap relative to inflation expectations.

The current decision of the Central Bank to tighten monetary conditions is aimed at ensuring the return on assets in the national currency and a reversion of term deposits in the banking system to the growing dynamics by maintaining real interest rates positive.

Financial stability. Preliminary stress tests were conducted on the impact of risks associated with the fulfillment of existing external financial obligations of commercial banks on the liquidity of the banking system.

According to the results, even in the risk scenario with a certain decrease in liquidity of local banks, there will be no drop below the minimum requirements due to the availability of sufficient liquidity buffers.

Commercial banks have sufficient liquidity and financial reserves to make payments and other obligations in a timely and complete manner at the request of the population and entrepreneurs.

A working group has been set up at the Central Bank to identify possible problems in banks and develop solutions to them, and regular operational communication channels with banks have been established.

Additional measures taken to minimize external risks

In order to provide the banking system with the necessary liquidity, the Central Bank will be providing short-term liquidity to commercial banks without any restrictions (through REPO and SWAP operations).

Limits on the average monthly balance of short-term bonds issued by the Central bank will be increased to 20 trillion sum.

Until July 1 of this year for commercial banks:

it is permitted to use the exchange rate formed as a result of a call auction on the currency exchange when setting exchange rates for retail transactions;

interest rates on Central Bank notes purchased by commercial banks at auctions have been raised to the upper bound of the interest rate corridor;

limits on two-week deposit auctions have been eliminated.

 At the same time, the forecast of macroeconomic development is being revised by the Central Bank taking into account the external economic situation. Herewith, with the decline in inflation and devaluation expectations, lowering external pressures on internal macroeconomic conditions, the policy rate will be gradually decreased.

The next Board meeting of the Central Bank to consider the policy rate is scheduled for April 21, 2022.

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