Tashkent, Uzbekistan (UzDaily.com) -- On 10 December 2020, the Board of the Central Bank decided to keep the basic rate unchanged, at 14.0% per annum.

This decision was made in order to preserve the effect of easing monetary policy in 2020, as well as to maintain moderately tight monetary conditions to ensure macroeconomic stability and create the necessary prerequisites in order to continue the recovery of economic activity in the first half of 2021.

The Central Bank, together with the Government, will take all necessary measures to achieve the interim inflation target in 2021 - below 10% in annual terms.

Inflation and inflation expectations 

Annual inflation rate in November of this year continued to slow down and reached 11.3%. At the same time, since the end of September there has been a certain acceleration in the growth of prices after their decline in the summer months.

The upward pressure on inflation was mainly exerted by seasonal fluctuations and the current dynamics of food prices. The rise in prices for food products in November amounted to 16.3% in annual terms. In particular, prices for meat products increased by 17.7%, fruits and vegetables - by 18.5%, bakery products - by 16.0% versus November 2019.

The growth rates of prices for non-food goods and services for 11 months of 2020 were significantly lower than the general inflation rate and amounted to 8.3% and 6.5%, respectively.

As a result, the annual core inflation rate continued its downward trend and fell to 11.5%.

Inflationary expectations of the population in November this year slightly decreased, while the expectations of business entities, on the contrary, increased. In a number of areas of entrepreneurial activity, the growth of inflationary expectations is associated with the need to implement additional costs due to the transition to alternative types of energy resources, or with the likelihood of a reduction in production volumes due to unstable access to traditional types of energy (natural gas, electricity) in winter.

Economic activity

According to the results of 10 months of this year, a number of main indicators of socio-economic development continued to show improvement. The decline in industrial production amounted to 1.6% (against 2.7% in January-September), the positive rates of retail turnover recovered at the level of 1.2%. An increase in production in the services and construction sectors was recorded at the level of 2.2% and 9.1%, respectively.

In the short-term forecast horizon, economic growth will still be below its potential, which is associated with a more gradual revival of demand and supply, as well as a longer period for certain sectors of the economy to return to full capacity.

Operational indicators of economic activity point to a gradual recovery trend.

The total number of transactions through the bank payment system in October increased by 7.3%, and in November this year. - by 1.1% compared to the previous month.

In November 2020, in the field of trade and paid services, the volume of cash receipts made up 14.3 trillion soums, which is 1.4% less than in October, but at the same time it is 11.8% more compared to the same period of last year.

According to preliminary calculations, real GDP growth expected by the end of 2020 will be about 1.0-1.5%.

Monetary conditions

In November 2020, the economy maintained positive real interest rates. The weighted average interest rate of the interbank money market was 14.1% and was formed within the interest rate corridor with a positive spread to the base rate.

At the same time, relative easing of monetary conditions continued in the economy under the influence of decisions taken to reduce the base rate, introduce a mechanism of acceptable rates, relax the mandatory reserve mechanism and expand the limits of the Central Bank's monetary operations to provide liquidity.

The weighted average interest rates on loans in the national currency in October fell to 19.2%. Interest rates on deposits of legal entities in national currency were formed at the level of 14.2%, and for individuals - 17%.

The positive dynamics of the growth of deposits in the banking system remained. For the period January-November of this year total deposits in national currency increased by 16%, including individuals - by 22.5%.

For January-November of this year commercial banks issued 112.2 trillion soums of loans and the growth of the balance of loans in the economy amounted to 32.1% (67 trillion soums).

Since the adjustment of the soum exchange rate in April of this year, the dynamics of the exchange rate has been characterized by moderately low volatility and is formed mainly under the influence of internal fundamental factors of supply and demand for foreign currency. In November of this year, the level of devaluation was about 0.6%, and since the beginning of the year - 9.7%.

When forming the soum exchange rate, the trend of demand for foreign currency became the main driver. The decrease in export earnings in the context of the pandemic was offset by an increase in the price of gold and a corresponding increase in the volume of interventions by the Central Bank, while maintaining the principle of neutrality of gold and foreign exchange reserves, as well as the use of foreign currency funds from the anti-crisis fund.

Taking this into account, in the context of a “lockdown”, the exchange rate was formed relatively stable (except for April of this year), and during the period of economic recovery with the manifestation of deferred demand for foreign currency, a slight acceleration of devaluation was observed. In particular, in the post-quarantine period of August-November of this year. the national currency has depreciated by 2.2%.

By the end of November of this year, the real effective exchange rate of the soum formed closer to the fundamental trend, narrowing its positive gap. A further decrease in the inflation rate next year will have a greater impact on the preservation of the real effective exchange rate near its equilibrium value.

Forecasts and risks

In the coming months, the probability of the prevalence of pro-inflationary risks in the economy remains low.

The main risks are associated with short-term trends in food markets. One of the pro-inflationary risks in the near future is the rise in food prices caused by seasonal factors, as well as the conditions of competition and the conjuncture of the world food markets.

In this regard, it will be important to ensure a stable supply of the necessary supply of goods in the domestic market.

At the same time, there is a possibility of further reducing prices for essential consumer goods by easing tariff and non-tariff restrictions on them.

Certain pressure on the rise in prices in certain industries may be exerted by the increase in costs associated with the temporary suspension of production processes due to interruptions in the supply of energy to producers.

In addition, there is an acceleration in the rate of credit burden in the economy (the ratio of loans in the economy to GDP). By the end of the year, this indicator is expected to grow to 48-50% of GDP. At the end of 2017, this indicator was in the range of 35-37% of GDP.

The annual inflation rate at the end of 2020 is expected to be in the range of 11.0-11.5%. According to the baseline forecast, its level in 2021 will decrease to 9.0-10.0%.

At the same time, the Central Bank will continue to carefully study the nature of inflation factors and risks under the influence of external and internal conditions and will take appropriate decisions on the main rate based on the dynamics of the inflation forecast.

The pivotal meeting of the Board of the Central Bank to consider the base rate is scheduled for 21 January  2021.