Changes in external economic conditions observed in March had a positive impact on the domestic foreign exchange market, inflation and depreciation expectations, and the dynamics of bank deposits.
Meanwhile, tighter monetary stance and measures aimed at stabilizing the foreign exchange market have served to relieve existing pressures and equilibrate foreign exchange and money markets beginning from the second half of March.
Current situation and expected economic conditions in the coming months show that the effects of the monetary policy measures have not been fully realised and that this process is still ongoing. The decision was therefore taken to sustain current monetary conditions to ensure that monetary policy measures are fully reflected in the economy.
External economic conditions. Although the economic situation in the main trading partner countries, including exchange rates, has stabilized to a certain extent since late March and early April, uncertainty and risks remain high across all macroeconomic indicators in the medium term.
Rising global commodity and energy prices and international logistics problems have been accelerating inflation around the world and, as a result, virtually all major central banks have raised their key policy rates.
These factors, in turn, will have a primary and secondary impact on our country through a tightening of financial conditions in international financial markets, imported inflation and changes in foreign trade flows.
In response to changes in external conditions, the national currency has stabilised after fluctuations in March (depreciated by 5% in March) and depreciated by 4.1% since the beginning of the year. According to preliminary estimates, current depreciation rate covers almost all short-term changes (shocks).
In particular, in the first 20 days of March, the volume of remittances fell to an average of $15 million per day, foreign exchange sales by individuals decreased to $32 million and purchases exceeded $42 million. In contrast, in the first 20 days of April, remittances reached an average of $40 million per day, foreign exchange sales by individuals reached $55 million, and average daily foreign exchange purchases declined to $22 million.
Meanwhile, demand for foreign currency by legal entities was balanced, and in the first 20 days of April the demand for foreign currency decreased by 13% compared to the corresponding period of March, while the supply increased by 21%.
Economic activity. According to the State Statistics Committee, real GDP growth in the first quarter of 2022 amounted to 5.8%.
According to forecasts made in beginning of the year, the country's GDP gap was expected to narrow and, the economic growth was projected to reach the potential level by the end of the second quarter of this year. Changing external economic conditions suggest that this negative gap will persist until the end of the year.
The fact that the fiscal deficit is expected to exceed the parameters set at the beginning of the year and the high proportion of social spending in budget expenditure this year will support purchasing power and income of households.
According to the surveys in the first quarter, the emerging foreign and domestic economic developments and currency market trends reflected to a certain extent the consumer confidence, which led to propensity to save and a cautious approach to expenditure.
Domestic price dynamics and inflation expectations. In March, the monthly inflation rate amounted to 1.5 percent, rising to 10.5 percent on an annualized basis and returning to the double-digit level. Core inflation stood at 9.1 percent year-on-year, with its contribution to headline inflation accelerated to 6.9 percentage points.
The rising price dynamics is mainly explained by imported inflation, expectations on price growth for basic food products in foreign markets and seasonal factors.
In April, there was a certain price adjustment, according to the weekly observations of the Central Bank, in the first 20 days of April the prices of some basic consumer goods decreased and levelled off.
The contribution of the fruits and vegetables group to prices in the second quarter will decline due to seasonal factors. Meanwhile, the upward contribution of non-food items is likely to increase due to external factors and structural changes,.
According to the survey in March 2022, inflation expectations of the population reached 15%, and those of entrepreneurs to 15.4%. Inflation expectations are predicted to decline in the future due to the relative stabilization of the exchange rate and structural reforms.
By the end of the year, the impact of supply factors (production, transport and logistics, imports, rising fuel and energy prices) on the dynamics of inflation is expected to be higher than demand factors.
According to the survey of industrial enterprises, there was an increase in the timing of deliveries of raw materials (works, services) in March of this year (the index of delivery times in March deteriorated to 47.5 from 51.4 in February).
Monetary conditions. The increase of the policy rate to 17% from March 18 of this year has also found its reflection in money market interest rates.
In particular, in the second half of March, the Uzonia index stood at an average of 17.2 percent, while in the first half of April it averaged 18 percent, reflecting tight monetary conditions.
During the first quarter, there was an increase in activity in the interbank money market with a total of 27.7 trillion sum worth of transactions, which is
1.3 times more than in the IV quarter of the last year. In March alone, a total of 12.5 trillion sum of deposit operations were conducted in the money market, caused by a temporary increase in the need for liquidity.
Interest rates on term deposits offered by commercial banks to individuals also increased to 20.9% in March (20.2% in January) due to current monetary conditions. This, in turn, supported recovery of growth rates of term deposits in the national currency.
In particular, in the first half of April, the volume of term deposits of individuals in national currency increased by 5% (decreased by 1.3% compared to the corresponding period of March).
In general, given relative dominance of assets in sum, the volume of term deposits in national currency has increased by 14% since the beginning of the year.
Forecasts. The Central Bank conditionally updated the macroeconomic forecasts in the framework of the baseline and risky scenarios taking into account external economic situation.
According to the baseline scenario, the inflation rate is expected to amount to around 12-14% by the end of the year (8-9% according to forecast at the beginning of the year) due to supply factors related to imported inflation, production, logistics and transportation.
Declining economic activity in major trading partners, fluctuations in their national currencies and migratory flows suggest that the volume of cross-border remittances this year will be 18-25% lower than last year.
Due to changes in the dynamics of gross external and domestic demand, relatively high deflator and fiscal conditions, real GDP growth in the country in 2022 is expected to be about 3.5-4.5% (5.5-6.5% according to forecast at the beginning of the year).
In general, these forecasts are based on many conditions, and macroeconomic forecasts will be updated at future meetings as the external economic situation changes and the results of macroeconomic and structural measures emerge.
The next meeting of the Board of the Central Bank to review the policy rate is scheduled for June 9, 2022.