Tashkent, Uzbekistan (UzDaily.com) – The Board of the Central Bank adopted a decision to keep the base rate unchanged at 15% per annum.

This decision was made in order to maintain the current course of monetary policy in the context of the simultaneous presence of proinflationary and disinflationary risks in the economy, and is aimed at creating conditions for maintaining positive real interest rates.

The increase in budget expenditures and the provided fiscal incentives have become the main factors in maintaining activity and economic processes in the context of the pandemic.

Interest rates helped to achieve positive economic growth in the first half of the year, despite the quarantine period. Slowdown in price growth in June-July was more restrained with a slight upward deviation from the projected inflation path.

At the same time, consideration of the possibility of lowering the base rate is postponed to the next meetings, and will proceed from the formation of a stable downward trend in inflation.

The Central Bank maintains the inflation forecast at the end of the year at the level of 11-12.5% and, together with the Government, will take all necessary measures to achieve it.

The annual inflation rate during the 1st quarter of this year was below a given inflation target trajectory. Basically, this was facilitated by a relatively restrained fiscal policy, moderate rates of lending to the economy and the maintenance of regulated prices at an unchanged level.

Since the beginning of the second quarter, inflation has slightly increased relative to the previous quarter and, at the end of June, amounted to 14.2%. Upward pressure on price increases in the second quarter of this year factors such as strong demand for food products, construction materials and essential goods and a more moderate than previously expected seasonal decline in prices for fruits and vegetables in June.

Core inflation during the second quarter had more accelerated growth rates and in June made up 13.8%.

Inflationary expectations of the population and business entities for the next 12 months have significantly decreased after a significant increase in April 2020. At the same time, inflationary expectations remain unanchored. Their level significantly exceeds the trajectory of the inflation target (target).

The results of the survey show that in the coming months, respondents associate the rise in prices, first of all, with the consequences of the pandemic and the rise in prices for goods and services of monopolies.

According to the State Statistics Committee, the volume of real GDP of the republic at the end of the first half of this year increased by 0.2%. The main factors of growth were the production of consumer goods, agriculture, construction work, while the factors of slowdown were investments and foreign trade, the turnover of which over 6 months decreased by 18.2% compared to the corresponding period last year.

After a decline of economic activity in March-April 2020, there was a gradual recovery trend in a number of indicators of economic development in May - June.

The total volume of all transactions through the bank payment system in June increased by 39% and 30% versus March and April, respectively. There was an improvement in the dynamics of growth in the volume of cash receipts in trade and paid services. So, after a sharp decline in April by 34.8% compared to the previous month (from 11.4 trillion soums to 7.5 trillion soums), the volume of cash receipts in the form of proceeds or other income in May increased by 33.8 %, in June - by 25.3% and reaching 12.6 trillion soums.

Moderately tight monetary conditions remained in Q2 2020. On the interbank money market, a positive spread (difference) was formed on the interest rates of deposits up to 2 weeks to the main rate.

Interest rates on deposits in national currency were relatively stable and characterized by growing dynamics. At the end of June, the weighted average interest rates on deposits of individuals amounted to 20%, and on deposits of legal entities - 17%.

The decrease in interest rates on loans in national currency from 25.8% at the beginning of the year to 23.7% in June is explained by the use of additional liquidity by commercial banks for lending to the acquisition of housing and entrepreneurship under government programs.

The dynamics of the exchange rate of the soum was formed against the background of the deterioration of the general economic situation in the world economy, reduction of foreign exchange earnings and the weakening of currencies of the main trading partners. As a result, in April of this year. the exchange rate was adjusted by 5.8%. In May-June, the exchange rate remained relatively stable and the level of devaluation during this period was about 0.4%.

The Central Bank, taking into account the current situation in the economy and the degree of uncertainty amid the ongoing pandemic, maintains the inflation forecast for the end of 2020 unchanged - at the level of 11-12.5%.

At the same time, by the end of the year, it is expected that the impact of energy prices on inflation will be minimized after the effects of the last year’s price increase are exhausted in the third quarter. As a result, regulated prices will help reduce pressure on price levels.

In the context of a long-term preservation of restrictive quarantine measures, the demand for basic food products and medicines will remain at a high level, while for goods that are not included in the essential category, it will decrease due to the redistribution and optimization of population spending.

In addition, restrictions on the movement of labor resources, deterioration of logistics, lengthening of the time and cost of transporting goods, in the event of further extension of quarantine requirements, may put upward pressure on the prices of basic goods.

The growth of lending to the economy in January-June 2020 by 18.2% (38 trillion soums), an increase in the money supply by 12.3% (11.2 trillion soums), and a noticeable excess of budget spending over revenues were the main factors of core inflation. In general, core inflation is expected to form around 12% by the end of the year.

In addition, in the context of intensified measures to counter the spread of the pandemic and increased health care costs in the second half of the year, pressure on the budget and centralized funds remains, which will lead to a noticeable expansion of the overall fiscal deficit compared to forecast indicators.

According to preliminary calculations, as a result of measures taken to restore economic activity and maintain the main sectors of the economy, it is expected that positive GDP growth rates will be achieved in the second half of the year and, at the end of the year, its real growth will be about 1.5-2.0%.

One of the key risks is the rapid change in the economic situation as a result of the impact of the pandemic and the measures taken to contain it.

This can lead to the emergence of a high level of uncertainty in the economic environment and unpredictability of the further development of economic processes, which significantly reduces the efficiency and accuracy of forecasts.

At the same time, the pressure on inflation from monetary factors, in particular, the accelerated growth of lending to the economy, remains. This, in turn, will require taking measures to balance the rate of its growth and repayment of previously issued loans.

In addition, a longer recovery in business activity in the countries of the main trading partners and the persistence of an unfavorable price environment in world markets may lead to a certain reduction in foreign exchange earnings from exports and cross-border remittances.

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.

An interim meeting of the Board of the Central Bank to consider the base rate is scheduled for 10 September 2020. A press release will be published following the meeting.