Tashkent, Uzbekistan (UzDaily.com) -- On 26 January, the Board of the Central Bank decided to keep the refinancing rate unchanged at the level of 16% per annum.

This decision is based on the need to maintain anti-inflationary monetary policy, maintain positive real interest rates and lower inflation expectations, the regulator said.

Annual inflation in December 2018 was 14.3%. The monthly increase in prices in December 2018 was 2.1% versus 4.1% in the corresponding period of the previous year.

In addition, in the 2nd – 4th quarters of 2018, there was a decrease in quarterly inflation compared with the corresponding period of 2017.

However, in Q4, inflationary pressure remained high, due to the influence of factors from both the demand and the cost side. In particular, such factors were the dynamics of domestic demand, the increase in regulated prices and a certain effect of exchange rate dynamics.

The increase in the refinancing rate in September 2018, coupled with the strengthening of prudential supervision, contributed to the tightening of both price and non-price credit conditions, which ultimately normalized the growth rates of lending.

The relatively low seasonal volatility of prices for fruits and vegetables, due to the improved storage infrastructure, and government measures to saturate the markets with basic foodstuffs have prevented the excessive acceleration of food inflation.

The scale of secondary effects from November increase in regulated energy prices in 2018 turned out to be much less than predicted, which could lead to a deferred increase in inflation in 2019 through an increase in production costs.

Also, there was almost no pre-adjustment of prices to changes in the tax system since January 2019 (especially to the expansion of the VAT base), which is mainly due to the fact that businesses have uncertainty about the impact of changes in the tax field on their financial activities and production costs.

As a result, annual inflation (14.3%) was at a lower level compared with the September forecast (16-17%).

In October-November 2018, the short-term and medium-term inflation expectations of the population and business grew against the background of the increase in regulated prices. In December, short-term expectations fell as respondents suggested that after the New Year period there would be relatively low demand in the markets.

Medium-term inflation expectations also declined slightly, but remained at a high level, reflecting the inflationary influence of the November rise in the cost of energy.

According to preliminary data, the real growth rate of the economy in 2018 was 5.1%.

In general, during the fourth quarter favorable internal conditions remained for investment, production and consumer activity.

Although in this period, the growth rates of lending slowed down, they still exceeded the potential of the economy for the use of credit funds.

Such lending dynamics, along with the continuation of the policy of adjusting the relative level of wages and increasing government spending, stimulated aggregate domestic demand.

In the fourth quarter of 2018, aggregate supply factors related to production activities were not affected by shocks. At the same time, the potential of the economy was insufficient to fully meet the expanding demand, a certain part of which was covered by imports.

This situation points to the need to balance aggregate demand with measures of monetary and fiscal policy in order to prevent deterioration of the balance of payments and excessive inflationary and devaluation pressure in the economy.

It also confirms that monetary and fiscal measures have a limited impact on stimulating economic growth at the current stage of economic development.

With the current structure of the economy, its sustainable growth and competitiveness should be based on a growth model based on increasing the productivity of production factors. In turn, productivity growth depends on infrastructure development and structural reforms in individual sectors of the economy.

External economic conditions in the fourth quarter were characterized by relative stability and did not exert significant pressure on the internal economic situation. Weak exchange rate volatility mitigated the negative effect of the transfer of deteriorating external conditions in the previous quarters of 2018. At the same time, in the fourth quarter, the average real effective exchange rate of soum weakened by 2.2% compared with August (when a strong weakening of the national currencies of the main trading partners was noted).

During the fourth quarter, interest rates in the money market, as well as on deposit and credit operations were adjusted following the decision to raise the refinancing rate at the end of September 2018.

The weighted average interest rate on interbank deposits in December 2018 increased by 2.9 percentage points compared with the third quarter and made up 14.2%.

The introduction of new instruments to absorb liquidity and the issuance of government securities in circulation have provided operational support for measures to tighten monetary policy.

Lending growth rates in Q4 slowed down compared to previous quarters.

After a slowdown in August and a reduction in September 2018, the dynamics of the volume of term deposits resumed its growth.

Positive real rates and a relatively high level of yield of soum deposits, coupled with the transition to a new mechanism for the formation of mandatory reserves, affected the decrease in the share of deposits in foreign currency from 36 to 30% or by 6 percentage points in total deposits.

The Central Bank will continue to monitor the actual and expected changes in monetary conditions under the influence of various factors and will respond to the emerging inflation risks.

The Central Bank retained the baseline inflation forecast for 2019 at the level of 13.5–15.5%. According to forecasts, after reaching a peak in February-March, annual inflation will slow down, but the planned increase in electricity and natural gas tariffs in June will have a restraining effect on its decline.

The main risks of accelerating inflation in 2019 are associated with the persistence of high inflation expectations, possible increase in prices for certain categories of goods and services due to the introduction of a new VAT payment mechanism, as well as the expansion of secondary effects from higher energy prices.

Maintaining the current monetary policy rate, effectively introducing a new mechanism for granting loan benefits, keeping costs and budget deficit within the approved parameters, as well as the successful implementation of tax reform will help to slow down inflationary processes. With the full implementation of these conditions, the Central Bank allows the revision of the inflation forecast for the first half of 2019.

The next meeting of the Board of the Central Bank to review the refinancing rate is scheduled for 20 April 2019.