Tashkent, Uzbekistan (UzDaily.com) - The basic rate of the Central Bank was left unchanged at 14% per annum in order to achieve a balance between reducing inflation to 10% by the end of the year and simultaneously maintaining economic activity in the context of persisting pro-inflationary factors and risks, as well as uncertainties about the extent of their impact.

The current monetary conditions and positive expectations around the external economic situation increase confidence in the achievement of the projected inflation rate.

Economic activity and aggregate demand. During the first 8 months of this year, a dynamic recovery in economic activity continued in the country. In most industries, growth rates have reached pre-pandemic levels.

In January-July, the volume of production of industrial goods increased by 8.9% compared to the corresponding period of last year, and by 6.1% compared to the same period in 2019. In turn, the volume of services provided increased by 20.5% compared to 2020, and by 21.3% compared to 2019.

According to the results of a survey of enterprises in the real sector of the economy, the index of economic activity was 52.8, having formed at a level slightly higher than the July values. At the same time, in the structure of the index, indicators of the service sector have significantly improved.

With the growth of consumer activity of the population in the economy, the volumes of trade and paid services also increase.

In January-August, the volume of receipts from trade and paid services to the cash desks of commercial banks increased by 39% compared to the corresponding period of last year, and by 53% compared to 2019.

Until the end of the year, economic growth and investment activity will be supported by fiscal stimulus and monetary conditions that remain in the economy.

At the same time, a higher than last year expected budget deficit and an increase from 1 September in social benefits, pensions and wages will lead to a significant increase in consumer demand in the economy.

External economic conditions. Over the past period, economic conditions in the world have been formed against the background of a global acceleration of inflationary processes as a result of a significant increase in prices for basic food and energy resources, as well as a reciprocal tightening of monetary conditions in many developing countries.

According to the July report of the International Monetary Fund, despite the fact that the forecast for real world economic growth in 2021 remained unchanged at 6.0%, forecasts for developed countries were revised upward, and for developing countries - downward, taking into account the situation of the pandemic and the rate of vaccination.

On the world commodity markets, the price of gold has been steadily declining, having lost 4-5% in price. The price of copper in the first half of the year showed an increase with a certain volatility, and decreased in the last two months.

In January-July 2021, the volume of exports (excluding gold) amounted to US$6.7 billion, an increase of 35% over the corresponding period of 2020. In turn, the volume of imports reached US$13.4 billion, which is 19% more than in the same period last year.

The volume of received cross-border remittances for 8 months increased by 35% compared to the corresponding period of 2020, amounting to US$4.9 billion (US$3.6 billion in 2020) and by 26% compared to the same period in 2019 (US$3.9 billion). This serves as one of the foundations for maintaining consumer activity.

The above factors played an important role in the formation of a stable supply of foreign currency and the exchange rate of the national currency in the domestic foreign exchange market. During the first 8 months of 2021, the soum exchange rate was in the range of 10449-10683 soums / US dollar and has depreciated by 2% since the beginning of the year.

The exchange rates of the currencies of the main trading partners (excluding Turkey) have not changed significantly since the beginning of the year.

Inflation and inflation expectations. At the end of August 2021, the annual inflation rate was 11.1%, as was observed in the last three to four months, which is slightly higher than the baseline forecast.

By the end of August, the annual increase in food prices reached 15.5%, and made the most significant contribution to the structure of inflation. It should be noted that in the summer months, indicators of monthly inflation for fruits and vegetables did not demonstrate the expected rates of seasonal decline.

The annual growth rates of prices in the groups of non-food products and services, consisting of stable components, in August amounted to 8.1% and 7.6%, respectively, which contributed to a slowdown in the aggregate inflation indicator.

The core inflation rate, cleared of seasonally variable prices for fruits and vegetables, fuel prices and regulated prices (tariffs), in August was lower than the general inflation rate and amounted to 9.5%.

According to the results of a survey conducted in August, inflationary expectations of the population for the next 12 months, as in July, amounted to 16.1%. At the same time, there was a slight increase in inflationary expectations among business entities, and the downward trend observed since April was replaced by growth.

Monetary conditions. In the second and third quarters of this year, due to the rapid growth in the volume of funds directed to the economy, there was a significant increase in the overall liquidity of the banking system, as a result of which the average weighted interest rates on deposits in the interbank money market decreased from 14.2% in April to 8. 7% in July.

As a result of a number of changes and measures taken by the Central Bank in terms of monetary operations, the average weighted money market interest rates in August amounted to 13.0% and formed with a 1.0% gap to the main rate, within the Central Bank's interest rate corridor.

Due to the expansion of the interest rate band, the activity of banks in the money market increased. In August, transactions were made in the amount of 8.4 trillion soums, which is 47% more than in July. The increase in the volume of overnight deposit operations served to form interest rates in the money market close to the main rate, within the limits of the interest rate corridor.

The formation of positive real interest rates on deposits over the last 8 months of the year contributed to the growth of total time deposits in the national currency by 26.5%, including time deposits of individuals in the national currency by 45%.

Interest rates on loans increased slightly compared to the beginning of the year due to high economic activity and demand. At the same time, the weighted average interest rate on loans to individuals in July was 22.0%, and on loans to legal entities - 21.2%.

The balance of credit investments in the economy increased by 11.5% compared to the beginning of the year. In particular, the balance of loans to individuals increased by 17.5% and serves to stimulate consumer demand.

At the end of the year, it is expected that the growth of credit investments will be proportional to the growth of nominal GDP and will be in the region of 18-20%.

Forecast and risks. While headline inflation remains unchanged, declining core inflation and the current moderately tight monetary conditions will be contributing factors to reaching the 10% inflation target by the end of the year.

A more stable decrease in the level of core inflation in the future will depend, first of all, on the effectiveness of measures taken to increase supply in the domestic product market, increase efficiency in production and improve the competitive environment.

In addition, it is expected that if the prices for basic food products are balanced, the perceived inflation and inflationary expectations of the population and business entities will move into a downward zone.

It is expected that the situation in the domestic foreign exchange market, the dynamics of the real effective exchange rate of the soum and the absence of pressure on it in the coming months will serve as a relatively stable formation of prices for imported and import-dependent goods in the consumer basket. This, in turn, will enhance the role of imports of consumer goods in stabilizing domestic prices.

The Central Bank will continue to carefully study inflationary factors and risks caused by external and internal economic conditions and take appropriate measures to eliminate them.

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