Tashkent, Uzbekistan (UzDaily.com) -- The Board of the Central Bank decided to keep the base rate unchanged at 14.0% per annum. This decision was made in order to create conditions for further reducing inflation, maintaining a positive level of real interest rates in the economy, as well as creating favorable conditions for continuing the recovery of economic activity.

In 2021, the Central Bank, together with the Government, will take all the necessary measures to achieve the interim inflation target below 10% at the end of the year.

Inflation and inflation expectations. Since the second half of 2020, the relative stability of regulated prices, restraint in consumer demand and, in general, the changed macroeconomic conditions have contributed to a slowdown in the annual rate of price growth and at the end of the year the inflation rate was 11.1%, having dropped from 15.2% in 2019.

The largest contribution to inflation - 6.5 p.p. introduced the rise in food prices. Inflation in this group of goods remained significantly higher than the general inflation rate and amounted to 15.3% at the end of the year.

The upward pressure on food inflation was mainly exerted by seasonal factors, stable demand for this group of goods, upward price dynamics in the world food markets and in the countries of the main trading partners. The most significant effect was the increase in prices for basic foodstuffs. In particular, prices for potatoes increased by - 42%, eggs - 38%, oil and fats - 27.0%, sugar - 21%, meat products - 18.1% and bakery products - 15.2%.

The growth rates of prices for non-food products and services in 2020 were significantly lower than the general level and amounted to 8.8% and 7.1%, respectively.

The annual core inflation rate in December continued to form above the general price increase, slightly accelerating to 11.7%, reflecting the trend of rising food prices and the relative stability of regulated prices.

During 2020, under the influence of increased uncertainty and uncertainty, there was a relative increase in inflationary expectations of the population and business entities. The peaks of the bursts occurred in April and July, while in August expectations decreased and were fixed at the level of 17-18% for the population and 18-19% for business entities, which indicates that inflationary expectations are not anchored.

Growth and looseness of expectations were also noted in the countries-major trading partners, which reflects the global processes of increased volatility in food prices and the uncertainty of economic agents regarding future trends.

Economic activity. In Q4 2020, the trend towards economic recovery continued. By the end of the year, positive growth rates are expected for most macroeconomic and sectoral indicators.

According to preliminary calculations, GDP growth in 2020 will exceed the baseline forecasts of the Central Bank (1-1.5%).

This is primarily due to an increase in industrial production by 0.1% in January-November 2020 (against a decline of 2.7% in January-September), retail turnover - by 2.4%, an increase in the services and construction sector by 2.2% and 8.7%, respectively.

In addition, alternative indicators also indicate a certain excess of forecasts of the main macroeconomic indicators. In particular, the total volume of transactions at the Republican Commodity and Raw Materials Exchange in the III-IV quarters has steadily increased. In the 4th quarter, this indicator increased 1.3 times compared to the corresponding quarter of 2019.

The total number of transactions through the interbank payment system in the IV quarter increased by 17.1% compared to the previous quarter. The volume of proceeds in the field of trade and paid services also increased by 19.7% in the III quarter of 2020.

The results of surveys conducted by the Central Bank to study economic activity and business sentiment show an improvement in their indices in the III-IV quarters after a decline in July 2020.

Monetary conditions. In 2020, the economy maintained positive real interest rates. The weighted average interest rate of the interbank money market in December was 14.4% and was formed within the interest rate corridor with a positive spread to the base rate.

The difference between the average daily cash turnover and their balance on correspondent accounts of banks (liquidity) in 2020 decreased by 38% compared to 2019, which indicates an increase in the efficiency of liquidity distribution and an increase in money market turnover.

In particular, the average monthly volume of money market transactions in Q4 2020 reached 7.5 trillion. soums, which is 44% more than in the third quarter of 2020.

In 2020, the total volume of deposits in national currency increased by 25% (9.6 trillion soums), including deposits of individuals increased by 31.6% (4.1 trillion soums).

By the end of the year, rates on deposits of individuals in national currency were formed at 17%, and for legal entities - 14.4%. Taking into account the slowdown in inflation, real interest rates on deposits throughout the year were at about 5% for individuals and 3% for legal entities.

At the end of 2020, the balance of loans in the economy increased by 34.3% or up to 280.4 trillion. soums. Despite certain difficulties in economic conditions and a temporary prolongation of loan repayment, commercial banks allocated 127 trillion. soums of loans, which is close to the indicator of 2019.

The weighted average rates on loans in national currency in December were at the level of 18.8%. At the same time, during the year, interest rates on short-term loans decreased to 18.4% (decrease by 7.3 percentage points), and for long-term loans to 19.1% (by 6.6 percentage points), which is partly due to the introduction of the mechanism of acceptable rates.

The demand for foreign currency during the IV quarter developed at a higher level, which is mainly explained by the manifestation of the demand delayed due to quarantine measures and the recovery of economic activity. In 2020, the soum exchange rate has weakened by 10.1%.

By the end of 2020, after the March and October strengthening, the real effective exchange rate (REER) of the soum approached its long-term trend, due to changes in exchange rates and increased inflation in major trading partners, as well as a relative decrease in inflation in the republic.

Forecasts for 2021. Taking into account the indicators of the 4th quarter of 2020 and the first half of January, the macroeconomic conditions are formed in accordance with the baseline forecast of the Central Bank.

Fiscal stimulus and the effects of relative easing of monetary conditions in 2020 will help support economic activity in the first half of 2021 on the demand side. At the same time, real GDP growth in 2021 is projected at 4.5-5.5%.

The main drivers of the economy in 2021 and the following years will be structural changes and economic reforms in the real sector of the economy aimed at developing competition, improving the investment climate and infrastructure.

According to estimates, the volume of credit investments in the economy in 2021 will be proportional to the growth of nominal GDP - in the range of 16-20%.

Taking into account the invariability of regulated prices and the balance of inflation factors, inflation is expected to further decline to 9.0-10.0% by the end of 2021.

It should be noted that it takes a certain time for the full transmission of previously made decisions to reduce the base rate, as well as the economy's adaptation to the relative easing of monetary conditions.

According to the Central Bank's estimates, the current “relatively tight” monetary policy environment is sufficient to maintain the baseline forecast economic growth in the first half of 2021 and ensure positive real rates (at 3-4%) in the money market.

Potential risks. In the coming months, the probability of the prevalence of increasing factors of inflation in the economy remains low.

At the same time, there are risks associated with the likelihood of one-off inflation factors and inflationary expectations remaining at a high level.

One of such risks in the near future is the rise in prices for food products. The policy of protectionism, the introduction of restrictive measures (quotas and tariffs) on the export of basic food products by exporters can also lead to higher prices for imports of basic food products.

In this regard, increasing the stability and sustainability of food markets will largely depend on the development and implementation of a comprehensive strategy to ensure food security in the republic. It will be important to take response measures to ensure the stable supply of the domestic market with the required volume of goods, including by diversifying the geography and reducing the concentration of imports of basic food products.

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