Dear participants of the press conference!
Today, at the key meeting of the Central Bank Board, we thoroughly reviewed the current and expected domestic and external economic conditions, as well as updated macroeconomic forecasts.
Based on the discussions, we have decided to keep the key interest rate at 13.5% per annum. This decision is justified by the following factors.
Inflation Dynamics
First, although inflation is expected to decline in 2025, risks that put upward pressure on prices remain.
Overall inflation at the end of 2024 stood at 9.8%.
In terms of the key components of the consumer basket, food inflation (including fruits and vegetables) played a significant role in the overall decline, with an annual rate of 2.4%. Meanwhile, non-food inflation remained at the 2023 level at 7.7%, while service inflation rose to 26.7% due to energy tariff liberalization.
Overall, in 2024, price growth for nearly three-quarters of the consumer basket was lower than in 2023, indicating broader price stability.
The slightly higher-than-expected year-end inflation was due to the secondary effects of energy price liberalization and supply-side factors related to certain products (meat, potatoes, vegetable oil), leading to a slower-than-expected decline in inflation in the second half of the year.
It is important to note that, even excluding utilities, inflation in the services sector remains above the overall inflation rate.
The core inflation rate, which excludes seasonal fruits and vegetables and regulated prices, stood at 7.2% at the end of 2024. After declining in the first half of the year, it remained stable at around 7% from August onwards.
The persistence of high service inflation and the lack of a sustained downward trend in core inflation indicate that demand factors in the economy remain strong.
Ensuring the steady decline of core inflation is crucial for the Central Bank in maintaining price stability.
In general, the persistence of inflationary pressures in the economy is also explained by the inability of some supply components to fully adjust to strong demand conditions.
According to our forecasts, inflation will reach the 5% target by the end of 2026, requiring measures to contain both demand and supply factors contributing to price pressure.
Additionally, the rise in global food prices may have a temporary impact on domestic prices. Measures will be taken in collaboration with relevant ministries and agencies to mitigate these effects.
In recent months, seasonal supply factors have influenced inflation expectations among households and businesses. In December, household expectations reached 14.4%, while business expectations stood at 13.9%.
Survey participants cited energy prices, utility tariffs, and exchange rate fluctuations as key factors behind rising inflation expectations. This could, in turn, have a certain impact on core inflation in the coming quarters.
Taking these factors into account, our updated macroeconomic forecast suggests that overall inflation in 2025 will range between 7-8%.
Economic Growth and Investment Activity
Second, strong consumer and investment activity is expected to persist in the economy.
At the end of 2024, GDP growth stood at 6.5%. Investments in fixed capital continued to grow at a high rate, contributing to increased supply in the domestic market.
Additionally, by the end of 2024:
· The total amount of loans issued to the economy increased by 14.3% compared to 2023, reaching 287 trillion UZS. As a result, the total outstanding loan portfolio grew to 566 trillion UZS, with local currency loans increasing by 19%.
· The number of interbank transactions increased by 31%, while revenues from trade and paid services rose by 29%.
· The amount of cross-border remittances to Uzbekistan increased by 30%, reaching $14.8 billion.
Cross-border remittances are expected to continue growing in 2025, positively impacting household incomes.
Moreover, the high growth rates of wages and remittances contributed to an 8.1% increase in real household income in 2024. This, amid high economic activity, will continue to support aggregate demand in the coming months, potentially exerting upward pressure on core inflation.
According to macroeconomic forecasts, real GDP growth in 2025 is expected to be around 6%.
The main drivers of economic growth will be sustained high economic activity and increasing volumes of foreign direct and domestic investments.
External Financial Conditions and Exchange Rate Stability
Third, external financial conditions are expected to gradually ease. No significant pressure on the real effective exchange rate is anticipated.
According to international financial institutions, global economic growth in 2025 is projected to rebound slightly to 2.7-3.3%.
Due to tight financial conditions and labor market adjustments, global inflation is expected to continue declining to 4.2% in 2025.
Leading central banks are cautiously easing monetary policy conditions in response to declining inflation.
This could lead to a decrease in external financing costs and increased access to financial resources in the coming years.
By the end of 2024, cross-border remittances and export growth, combined with moderating imports, have improved the current account balance.
Specifically, in 2024:
· Total exports increased by 8.4%, while non-gold exports rose by 16.5%.
These factors contributed to balancing supply and demand in the foreign exchange market, ensuring exchange rate stability. As a result, in 2024, the annual depreciation of the national currency stood at 4.7%.
Considering economic trends among trade partners, no significant pressure on the exchange rate is expected in the coming months.
Although the real effective exchange rate strengthened slightly in late 2024, this was mainly due to the depreciation of trade partners' currencies and the relatively higher inflation rate in Uzbekistan compared to its trade partners.
As inflation declines in Uzbekistan in the second half of 2025, the real effective exchange rate is expected to return to its medium-term trend.
Monetary Conditions and Financial Stability
Fourth, monetary conditions remain relatively tight, contributing to increased national savings.
Throughout 2024, money market interest rates remained within the policy rate corridor.
Real interest rates in the economy have encouraged household savings.
The total volume of household deposits in banks increased from 79 trillion UZS in 2023 to 113.5 trillion UZS in 2024, marking a 43% growth.
In 2025, short-term money market interest rates will continue to be maintained within the interest rate corridor and close to the policy rate.
The high growth rate of bank deposits is expected to persist in 2025.
Overall, the increase in deposits plays a crucial role in supporting sustainable economic growth, as well as financing investment and production projects.
Maintaining a tight monetary policy stance will ensure moderate credit growth, high deposit growth, and balanced aggregate demand, helping reduce the inflationary impact of monetary factors.
Taking these factors into account, the Central Bank Board has decided to maintain the key interest rate at 13.5%.
In the medium term, the Central Bank will ensure that monetary conditions remain sufficiently tight to achieve a stable decline in inflation to the 5% target.
If aggregate demand and inflationary pressures intensify beyond expectations, monetary conditions may be reassessed.
