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At the meeting of the Central Bank Board on July 21, 2022, the policy rate was reduced to 15% per annum

Update date:  21 Jul 2022, 13:13
21 Jul 2022

In May-July, the relative stabilization of the macroeconomic situation due to the reduction of short-term external shocks and the delay in expectations regarding the liberalization of regulated prices increases the probability of the formation of the inflation rate at the end of 2022 below the median of the forecast corridor of 12-14%, that is, near the lower bound.

This, in turn, will allow to remove the added burden of short-term factor impact and expectations from the forecast level of inflation in April and, accordingly, to change the monetary conditions.

Based on the established trends of inflationary expectations and the expected dynamics of prices and macroeconomic indicators in the coming months, the policy rate was reduced by 1 p.p. to 15% annually.

Taking into account the continuation of global inflationary processes, "relatively tight" monetary conditions will be maintained until the end of the year in order to keep the influence of monetary factors on prices at a minimum level, to ensure the relative attractiveness of assets in national currency.

In May-July of this year, external economic conditions were relatively moderate for the economy.

The real effective exchange rate depreciated by about 0.2% in June compared to May.

Growing trends were observed in both export earnings and import payments for foreign trade operations. In the second quarter, export receipts increased by 41% compared to the first quarter, and import payments increased by 19%.

In April-June, FX flows that entered to the country (through export earnings, remittances and FX credit channels) were higher than the annual seasonal growth rate, supporting the volume of supply in the domestic FX market. In particular, in the second quarter, FX sales of banks and economic entities increased by 1.8 times compared to the first quarter.

Internal economic conditions. According to the results of the first half of this year, the economic growth is 5.4% in real terms and the growth rate is lower compared to the corresponding period of last year (7.2%) and higher compared to the forecasts of April (3.5-4.5%).

It is noteworthy that higher growth rates were observed in agriculture, consumer goods production and retail trade sectors compared to last year. Preservation of these trends is expected to have a positive effect on price formation in the coming months.

In the first half of the year, due to the increase in salaries and pensions, a significant increase in average nominal wages was observed in the economy compared to the corresponding period of the previous year, and this, in turn, became one of the main factors stimulating aggregate demand.

During this period, commercial banks allocated 10% more loans to the economy compared to the corresponding period of the previous year.

Inflation and inflation expectations. In June, the annual rate of headline inflation was 12.2%, and this increase is mainly explained by factors such as import inflation in the context of global inflationary processes, problems arising in the supply and logistics of goods, and the liberalization of grain production and sale prices.

As part of annual inflation, food prices increased by 16.5%, while non-food goods and services rose by 10.7% and 6.8%, respectively.

This, in turn, requires a focus on stabilization of food prices in the face of declining headline inflation.

According to the results of surveys conducted in June, the inflationary expectations of households regarding price growth for the next 12 months showed decreasing dynamics after the sharp increase in May (17.6%) and formed around 16.4%, while those of business entities decreased to 15.7% (17.3% in May).

Weekly observations of consumer price changes show that the weekly rate of growth has been relatively stable in the first 2 weeks of July, after peaking in the last weeks of May and early June.

Monetary conditions. Due to the reduction of the policy rate, the weighted average interest rate in the interbank money market in June decreased to 17.1% from 18% in May. In June, the UZONIA formed between the policy rate and the higher bound of interest corridor - around 17%.

In the money market, interest rates on relatively longer-term operations from one to three months decreased from 19.6% in May to 18.9% in June.

In June 2022, the average interest rate on term deposits of individuals in national currency was 21%, and on deposits of legal entities was 17.7%. Real interest rates of deposits were formed at the level of 7.8% for household deposits and 4.9% for deposits of legal entities. Term deposits of the individuals in national currency increased by 21% in the II quarter and by 30% from the beginning of the year.

Interest rates of loans directed to the economy in national currency also decreased compared to May (23%) and averaged 22.8%.

Macroeconomic forecasts. In general, the situation observed in the global and domestic economy in the first half of 2022 was formed in a way that was not foreseen in any scenario of macroeconomic development under the influence of sharp shocks and uncertainties due to the geopolitical situation that occurred during this period.

Although the external macroeconomic trends expected in the second half of 2022 and 2023 will take place as envisaged in the alternative scenario of the "Monetary Policy Guidelines" in the fall, adjustments in the economic policies of developed countries (increasing interest rates by the central banks of developed countries were planned to begin in 2023 , and in practice it started much earlier from the first half of 2022) will create additional complications in ensuring economic growth and macroeconomic stability in developing countries.

Taking into account the uncertainties regarding the external economic situation, the formation of aggregate demand and the expected trends in terms of supply, the Central Bank revised the macroeconomic development forecasts for 2022.

Considering the emerging inflationary processes, the postponement of regulated price increases, and taking into account the existing uncertainties and risks, the inflation rate at the end of the year is predicted to be around the lower bound of the 12-14% corridor.

Based on the available reserves in the economy and the current trends of aggregate demand, it is estimated that the real GDP growth by the end of the year will be around 5.0-5.5% (the April forecast was 3.5-4.5%).

As a result of today's decision, the monetary conditions that will be formed in the future will ensure that real interest rates will be positive, and the profitability of assets in national currency will be preserved with the decrease of the inflation forecast.

The Central Bank carefully studies the inflationary factors and risks caused by external and internal economic conditions and responds appropriately to eliminate them.

The next meeting of the Central Bank Board to review the main rate is scheduled for September 8, 2022.

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