Tashkent, Uzbekistan (UzDaily.com) -- By a decision from 5 March 2020, the Board of the Central Bank kept the basic rate at 16% per annum

This decision is due to the upcoming liberalization of regulated tariffs and the increase in foreign economic uncertainties associated with the coronavirus.

The Central Bank admits that the main peak of inflation will occur in the second quarter. Meanwhile, in the second half of 2020, the impact of tariff growth will gradually decrease, as a result, the annual inflation rate will approach the upper limit of the forecast corridor.

An analysis of historical inflation shows that over the past years one of its main factors was the systematic increase in tariffs for goods and services established by the state. It should be noted that if the process of introducing market principles of pricing in this segment is delayed, further annual price adjustments will be required, which, in turn, will continue to provide additional inflationary pressure, making it difficult to achieve the inflation target by 2023.

A one-time transition to market pricing may have a certain short-term effect on inflation, but this, in turn, will create the conditions for solving problems on the way of developing production processes, increasing the availability of energy resources in the regions of the republic and increasing the supply of goods and services.

Inflation and inflation expectations. Annual inflation in February amounted to 13.5%, decreasing by 0.8 percentage points. compared with January 2020 (14.3%) and 1.7 percentage points compared to December 2019 (15.2%).

In February 2020, core inflation fell to 12.5% per annum, down 1.4 percentage points. compared to December 2019.

First of all, fundamental factors contributed to the slowdown in inflation, such as moderate growth in lending to the economy and budget expenditures, as well as the exhaustion of the influence of one-time factors that arose in 2019 (expansion of VAT coverage in January, devaluation of the soum rate and increase in energy prices in August, liberalization of prices for flour and bread in October).

The decrease in seasonal volatility served to stabilize food prices in January-February this year. the price growth of this group amounted to 2.4% (in January-February 2019, 4.9%).

Thus, due to the expansion of storage infrastructure and greenhouse production, a sharp increase in prices for fruits and vegetables in the winter months was not recorded. In particular, if in January-February 2019, fruits went up by 15.6%, vegetables by 13.8%, then this year the price growth rate slowed down almost twice, amounting to 7.7% and 6.3%, respectively.

As a result of adaptation of prices for wheat flour and bakery products to market conditions, their impact on the CPI decreased significantly and the contribution of bakery products amounted to 0.08 percentage points. (in January-February 2019 - 0.2 percentage points).

In the reporting period, prices for meat and meat products grew at the same rate as in January-February 2019 (2.3%), having a significant impact on inflation.

In January-February 2020, the growth in prices for non-food products amounted to 0.8% (in the same period in 2019 - 2%), the increase in tariffs for services amounted to 0.6%, which is two times lower than in the same period in 2019 (1.3%).

Inflation expectations of the population and businesses, after growth in the IV quarter of 2019, decreased significantly in January-February 2020. In particular, the medium-term expectations of the population and business entities decreased from 18% and 18.1% in December 2019 to 15.5% and 16.3% in February 2020, respectively.

Monetary conditions were formed under the influence of moderate conditions of fiscal policy, moderate growth of the loan portfolio and the activation of market instruments of monetary policy.

The launch of a line of new monetary instruments contributed to the convergence of the weighted average interest rates on the interbank money market to the Central Bank’s basic rate (15.8% in January and 15.2% in February).

Since the beginning of the year, the Central Bank issued its own medium-term bonds in the amount of 1.75 trillion soums, as well as attracted funds of the Ministry of Finance for special medium-term deposits of the Central Bank in the amount of 2 trillion soums, which served to reduce the structural surplus of liquidity in the banking system.

In February, the Central Bank provided liquidity to commercial banks, in particular, through repo transactions in the amount of 53 billion soums and swap operations for 261 billion soums. To withdraw excess liquidity, deposit auctions were carried out in the amount of 110 billion soums and overnight deposits in the amount of 310 billion soums.

In January-February 2020, the growth rate of lending to the economy amounted to 2.5%, which is 3.5 pp less compared to the same period in 2019 (6.0%).

Despite the slowdown in the loan portfolio, the growth dynamics of loans in different market segments showed a heterogeneous character.

In the segment of consumer and mortgage loans for individuals in national currency, a high growth rate of 5.2% was observed (provided 38% of the increase in the total loan portfolio). The high demand for these loans, despite the relatively high interest rates on them, is explained by a number of reasons, in particular, the formed pent-up demand in this segment, the level of financial literacy and the preservation of inflationary expectations based on historically high inflation rates.

Relatively low interest rates on loans in foreign currency led to an increase in these loans by 3.4%.

Continuation of this trend creates the prerequisites for the active use of macroprudential measures in respect of lending to the population and loans in foreign currency in order to eliminate possible risks and maintain a debt burden at an acceptable level.

On the whole, in January-February of the current year, the tendency to strengthen citizens’ confidence in the national currency continues. In January-February, term deposits of individuals in national currency increased by 9.4%, while in foreign currency they remained virtually unchanged.

The moderate growth rate of the level of cash infusions (budget expenditures, loans) into the economy also contributed to balancing the demand in the domestic foreign exchange market.

So, if in the IV quarter of 2019, the soum exchange rate depreciated by 0.7%, then in January-February 2020, the sum showed a relatively stable dynamics. This trend had a positive leveling effect on inflation.

Measures to reduce budget spending and lending to the economy to some extent served to balance the growth in demand for imports. In particular, in January 2020, the growth rate of imports slowed to 23% (in January 2019 - 43%, in February - 40%).

Risks and uncertainties. Economic problems in the global economy associated with the spread of coronavirus can have a certain impact on the economy of Uzbekistan.

Moreover, the scale of influence will be determined by the duration of the crisis in China. The reduction in imports of some goods from China, which have a tangible share in the consumer basket, may create some pressure on domestic prices.

It is expected that the effect of the “coronavirus effect” on domestic prices will be one-time and short-term. At the same time, unsecured demand for imported goods from China will be satisfied by expanding domestic production and establishing imports from other countries, as a result of which prices will stabilize in the medium term.

An inadequate increase in the supply of meat and meat products compared with a significant increase in demand in the domestic market creates some pressure on prices.

Solving the problems of uninterrupted supply of meat to the domestic market, the development of this industry and food supply will require some time. At the same time, insufficient meat imports from other countries (Belarus, Ukraine, Kazakhstan, Kyrgyzstan), as well as rising import prices for meat can affect meat prices in the medium term.

It should be emphasized once again that a key factor in the steady slowdown in inflation is the implementation of an appropriate structural policy in the field of transport infrastructure development, market competition, and the uninterrupted supply of gas and electricity to the economy.

Inflation forecast. The downward inflation curve in January-February 2020 shows that a decrease in the growth rate of the loan portfolio and increased fiscal discipline can ease inflationary pressures on the economy and make it possible to minimize the impact of non-monetary inflation factors, including regulated energy prices, without delaying the solution of fundamental problems in this direction for the next years.

At the same time, inflation retention within the forecast indicators is due to:

- maintaining the deficit of the general fiscal balance in strict accordance with the approved parameters for 2020 (2.7% of GDP), ensuring the balance of income and expenses of the RDF;

- maintaining the current proper monetary policy rate with moderate growth rates in the banks’ loan portfolio not exceeding the growth of the nominal GDP (up to 25%) and the subsequent reduction in the credit market segmentation;

- balanced growth of external debt, in particular balancing the growth of loans in foreign currency, the debt burden in the economy and a decrease in the level of dollarization.

At the same time, the Central Bank will continue to carefully study the nature of the factors and risks of inflation under the influence of internal and external factors, and as the forecast dynamics of inflation are formed, it will take appropriate decisions on the level of the basic rate.

The main meeting of the Central Bank Board on the revision of the main rate is scheduled for 23 April 2020. A press release will be published after the meeting.