Tashkent, Uzbekistan (UzDaily.com) -- By a decision from 19 October 2019, the Board of the Central Bank kept the refinancing rate unchanged at 16% per annum.

This decision of the Central Bank is based on the continuing dynamics of inflation and inflation expectations, the occurrence of one-time inflation shocks, as well as on the basis of the need to use a prudent approach to further increase rates and ensure the financial stability of commercial banks, due to some concerns about the growth of loans in foreign currency and strengthening the segmentation of the credit market, the press service of the Central Bank of Uzbekistan reports.

During the first 7 months of this year inflationary processes in the economy developed according to the baseline scenario, in connection with which the annual growth rate of consumer prices was within the forecast parameters of 13.5-15.5%.

However, in the III quarter of this year individual inflation risks realized in alternative scenarios were realized, which led to accelerated inflation in the considered time period.

Inflation and inflation expectations.

For 9 months of this year consumer prices in the country increased by 9.7%.

However, if from January to July this year annual inflation was on average 13.5% -13.7%, then in August it rose to 16.5% and broke through the upper boundary of the forecast values of the base corridor, due to the influence of mixed factors, in particular fundamental ones, due to the accelerated growth of investment loans and government spending, the devaluation of the sum, as well as short-term ones - caused by an increase in regulated tariffs for electricity and gas prices, indexation of wages and pensions.

In September 2019, annual inflation slowed down to 16%, which is confirmed by the fact that the above factors were more of a temporary nature. The exception is the month of October, in which some acceleration of inflation risks is expected due to the abolition of VAT exemptions on a number of imported goods, as well as the liberalization of prices for flour and bread. Over the remaining period of the current year, due to the gradual fading of the effect of one-time shocks, the growth rate of consumer prices will gradually decrease and will form near the upper boundary of the forecast corridor - 15.5% per annum.

During 2019, the main inflationary pressure on annual inflation was exerted by food prices and tariffs for services (regulated prices), which grew by 17.5% and 19.5%, respectively, compared to the same period last year. At the same time, the largest contribution to the CPI growth in January-September was made by services - 4.3 percentage points. compared with 2.6 pp for 9 months of last year.

In August 2019, there was a certain increase in short-term inflation expectations, due to the influence of short-term factors (growth in regulated tariffs and prices, indexation of wages), but by the end of September their trend went down.

However, a decrease in medium-term inflation expectations in September 2019 it turned out to be slower, which is mainly due to the adaptive nature of the formation of the expectations of economic agents, as well as the persistence of uncertainties about future price increases.

Macroeconomic conditions for 9 months of this year developed under the influence of outstripping growth rates of domestic demand.

According to preliminary estimates, in January-September of this year annual real GDP growth rates remained at the level of the previous two quarters. The key factors supporting the positive dynamics of economic growth remain demand factors, namely, credit activity of banks and an increase in government spending.

In July-August 2019, there was an acceleration in the demand for foreign currency under the influence of internal and external factors. As a result, the devaluation of the national currency began to accelerate. In particular, if in January-July 2019, the dollar exchange rate increased by 4% and the monthly growth amounted to an average of 0.6%, then in August there was a sharp (8.2%) increase in the exchange rate. However, by September, the dollar exchange rate again returned to its previous trend, and the monthly growth slowed to 0.5%.

Money-credit policy.

According to the results of 9 months of this year, lending to the economy grew by 38.3% (by 38.6 trillion soums). At the same time, loans in national currency since the beginning of the year increased by 34.3% compared to 61.1% in the same period of 2018.

It should be noted that the terms of the monetary policy (MCP) have an uneven effect on the credit market. So, if in the commercial segment of lending in national currency there is a certain slowdown, then retail (consumer loans) is characterized by higher growth rates. At the same time, against the background of relatively low interest rates, accelerated growth was also noted in foreign currency loans.

Due to the fact that foreign exchange and retail lending is less sensitive to changes in the terms of the DCT, a further increase in the effectiveness of the monetary policy measures of the Central Bank is largely dependent on the use of macroprudential supervision measures.

In addition, the gradual liberalization of interest rates in the economy and the simultaneous improvement of lending conditions and mechanisms based on market approaches will further enhance the efficiency of the “credit channel” of the transmission mechanism.

From January to September this year the growth of fixed-term deposits of the population and business entities in national currency amounted to 43.6%, with their share in the total amount of sum deposits being 33% (for the corresponding period of 2018 - 23.5%).

Forecasts and risks.

An unjustified increase in the refinancing rate may lead to an even tougher tightening of the terms of the DCS for those segments of the economy that do not meet the criteria for soft loans.

In the existing realities of economic development, in order to ensure not only price, but also financial stability, the Central Bank takes a prudent approach to pursuing monetary policy, which is an integral element of macroeconomic balance.

Therefore, while maintaining the refinancing rate at the current level, the Central Bank will simultaneously take macroprudential supervision measures, the essence of which is a more restrained approach to lending by banks in order to eliminate imbalances in the financial market and ensure financial stability of the entire economy.

At the same time, at present the Central Bank refinancing rate is at an acceptable level for the economy, when the real interest rates on deposits and loans in national currency are positive.

At more moderate lending rates, as well as taking into account already implemented inflation risks (indexation of wages and pensions, increase in electricity and gas tariffs, devaluation of the sum), inflation is expected to slow down and form at the end of the year near the upper limit of the base forecast corridor - 15.5%.