Tashkent, Uzbekistan (UzDaily.com) – The Board of the Central Bank adopted a decision to set the basic rate at 15% per annum.

This decision was made taking into account the downward revision of the inflation forecast amid a slowdown in economic activity amid falling external and domestic demand. This was reported by the press service of the Central Bank.

Given the weakening and lowering pressure on inflation of demand factors in the second quarter and before the end of the year, according to updated forecasts, by the end of 2020, the inflation rate in the country will decrease by 1 percentage point compared to initial estimates (12-13, 5 percent) and will reach 11-12,5%.

At a meeting of the Board on 5 March 2020 the basic rate was left unchanged due to the uncertainties associated with the liberalization of regulated prices and the impact of the coronavirus pandemic on inflation through supply factors.

The change in the timing of liberalization of regulatory prices, as well as the impact of the coronavirus pandemic on inflation, in the current economic conditions is more manifested by supply factors, and in the future these factors will become reducing.

Economic activity and macroeconomic forecasts. Since March 2020, in the world and countries - the main trading partners, there has been a decrease in indicators of economic growth and activity as a result of increased measures to combat the coronavirus pandemic, falling oil prices and reducing demand.

A drop in economic activity and a decrease in household incomes, in turn, lead to a significant decrease in domestic demand.

Given the high uncertainty of the duration of the coronavirus pandemic and its impact on the global economy, a revision of the basic forecast for real GDP growth in Uzbekistan for 2020 requires additional analysis. The conclusions of the Central Bank on this indicator will be presented after the completion of analytical calculations.

The fall in economic activity primarily affected the number of transactions carried out through the banking system. In particular, the number of transactions completed through the interbank payment system in March 2020 decreased by 6% compared to the same period last year.

In the first 10 days of April 2020, the volume of transactions made through payment terminals decreased by 25.9% compared with the corresponding period of March.

There was also a significant decrease in the number of transactions on the Uzbek Republican Commodity and Raw Materials Exchange. In particular, the volume of purchases made in the first two weeks of April decreased by 28% compared with the corresponding period in March.

Along with this, there is a certain tendency towards a decrease in lending activity in the economy. In January-April 2020, the growth rate of the balance of loans to the economy issued by commercial banks slowed by 3.5 percentage points. compared with the same period last year and amounted to 7%.

Banks extended the terms of payments of 16.4 trillion soums of loans to individuals and legal entities. This, in turn, leads to a certain reduction in the possibilities of bank lending as a result of a decrease in cash inflows to banks.

Inflation and inflation expectations. The inflation rate was lowering faster than the initial forecast indicators, and in March this year, annual inflation amounted to 13.6%.

Consumer price growth in the first quarter of 2020 slowed down to 1.5 percentage points compared with the corresponding period last year and amounted to 2.8%, which is 0.5 percentage points below the preliminary forecast.

This is mainly due to the invariability of some regulated prices over a given period of time, as well as to a slowdown in core inflation due to the relatively stable exchange rate in January-February.

In March, inflationary expectations of the population remained unchanged at 15.5 percent. A further decrease in inflation in the economy and the relaxation of quarantine restrictions, in turn, will contribute to lowering inflation expectations.

Inflation forecast. Based on updated forecast indicators, taking into account current and expected conditions in the economy, by the end of 2020 inflation will be about 11-12.5%, which is explained by the following factors:

First, a decrease in external and internal economic activity affects the incomes of the population, which leads to a significant reduction in demand for goods and services that do not belong to the group of essential goods in the consumer basket.

Secondly, the establishment of zero rates of customs duties and excise tax on imports of a number of basic consumer goods and their raw materials by December 31, 2020 will prevent a sharp increase in prices for goods in high demand during the quarantine period.

Thirdly, as a result of the postponement of the next stage of increasing energy prices in the framework of price liberalization reforms this year, due to falling energy prices on world markets or liberalizing domestic prices without raising them, these factors will not have an increasing effect on inflation.

Fourth, the dynamics of price increases for certain foodstuffs and consumer essentials under quarantine is temporary, the saturation of markets with these goods, as a result of the collection of a new crop of agricultural products in the coming months and the measures taken by the Government to ensure food security, will serve stabilization of their prices.

In addition, these factors to reduce inflation will help mitigate the negative impact of the devaluation of the national currency on domestic prices.

In turn, Central Bank interventions in the domestic foreign exchange market based on the principle of neutrality of gold and foreign exchange reserves will be carried out without affecting the fundamental trend of the exchange rate.

Monetary conditions. In March-April 2020, the liquidity level in the banking system was formed under the influence of monetary operations conducted by the Central Bank, and was sufficient to ensure the stability of the banking system.

The use of monetary operations both to provide liquidity to commercial banks and to absorb excess liquidity served as a moderate redistribution of liquidity in the banking system, and the formation of interest rates in the money market near the Central Bank’s main rate.

The weighted average interest rate on the money market in March of this year amounted to 16.0%, and over the past period of April - 16.6%.

Over the past period of 2020, the balance of term deposits of the population in national currency increased by 10.2% (714 billion soums), and the balance of term deposits in foreign currency decreased by 1.2% (by 67 billion soums).

In turn, a decrease in the base rate in the face of lower inflation will help maintain positive real interest rates in the economy and the attractiveness of deposits in national currency.

Uncertainty and risks. Uncertainty remains regarding the extent and duration of the impact of the coronavirus pandemic on the economy.

It is expected that in the face of deteriorating external economic conditions, the volume of cross-border money transfers entering the country by the end of the year will be significantly reduced compared to last year.

At the same time, the Central Bank will continue its in-depth study of the nature of the factors and risks of inflation under the influence of external and internal conditions and will make appropriate decisions at the basic rate based on the formation of the dynamics of the inflation forecast.

An interim meeting of the Board of the Central Bank to review the basic rate is scheduled for 11 June 2020.