Tashkent, Uzbekistan (UzDaily.com) -- The Board of the Central Bank of Uzbekistan kept the basic rate unchanged at 14% per annum. This was reported by the press service of the Central Bank.

This decision was made in order to balance the decline in inflation and support economic activity in the context of economic recovery, as well as to maintain the slowing dynamics of inflation and inflation expectations against the backdrop of risks of rising food prices in foreign markets.

Internal economic conditions

The macroeconomic situation that developed in the first quarter of this year and observed in April is being formed under the conditions of the baseline scenario of the main directions of monetary policy for 2021 and the period 2022-2023.

In particular, economic activity continued to recover in February-March. After a decline in January, the dynamics of all components of the economic activity indicator, calculated on the basis of changes in the volume of transactions on the commodity exchange, the total volume of interbank transactions, cash receipts from trade and paid services, recovered to a large extent in March.

According to the State Statistics Committee, in the first quarter of 2021, GDP grew by 3% in real terms compared to the same period last year. In particular, the output of industrial goods increased by 3.8%, agriculture - by 3.1%, services - by 5.8% and construction works - by 0.5%. Also, in this period, there was an increase in retail trade turnover by 2.8%.

An increase in the salaries of employees of budgetary organizations and institutions, as well as scholarships in February, an increase in investment volumes due to decentralized sources and allocated loans, became factors supporting aggregate demand in the economy.

In particular, during the first quarter of this year, the volume of investments in fixed assets amounted to 35.6 trillion soums. At the same time, investments from non-centralized sources, amounting to 31.3 trillion soums, increased by 13.6% over the same period last year.

In January-March 2021, commercial banks allocated 32.9 trillion soums of loans to the economy, which is 11% more compared to the same period of the previous year.

Foreign economic conditions

Since the beginning of the year, there has been a gradual recovery in the global economy and the economies of the main trading partners.

The revival of economic activity around the world is also reflected in changes in the prices of major commodities. The positive dynamics of the growth of prices for raw materials in the first quarter of this year served to increase the export of goods (excluding gold and gas) by 25% compared to the same period last year. At the same time, the export of non-ferrous metals increased by 58%, textiles - by 38%, chemical products - by 21%.

In the first three months of this year, the volume of cross-border remittances increased by 31% compared to the same period last year and amounted to US$1.4 billion.

The above trends, in turn, contributed to the stability of the domestic foreign exchange market, and as of 1 April 2021, the devaluation of the national currency rate since the beginning of the year was 0.2%.

Inflation and inflation expectations. 

In March this year, annual inflation was 10.9%, which is 0.7 percentage points lower than in January.

At the same time, the growth of food prices, amounting to 13.8% in annual terms, retains an increased impact (5.8 percentage points) on the overall inflation rate.

The high growth rates of prices for essential consumer goods are explained by the situation in foreign markets, which is developing under the influence of crop yields and logistics, as well as limited competition and supply in the domestic market.

The rise in prices for non-food products and services amounted to 8.8% and 8.4%, respectively, and these groups have a downward impact on overall inflation.

At the end of March this year, core inflation (inflation rate excluding prices with high seasonality and regulated prices) amounted to 11.6%, which is slightly higher than the general inflation. This, in turn, testifies to the persistence of inflationary risks in the economy.

Despite the fact that since the beginning of the year there has been a downward trend in inflationary expectations of the population and business, they are still formed significantly higher than the actual inflation rates. In particular, in March, inflationary expectations of the population for the next 12 months amounted to 15.5%, enterprises - 15.9%.

In general, the gradual decline in inflation expectations, their approach to the indicators of early 2020, indicates a decrease in expectations of the role of last year’s boosting effects associated with the pandemic. In turn, the current trends in the prices of vegetable oil and sugar may become factors driving up inflationary expectations.

Monetary conditions.

In January-March 2021, monetary conditions were relatively tight. Weighted average interest rates in the money market in March reached 14.4% or 3% in positive real terms. During the first quarter, the Uzonia index also formed completely within the interest rate corridor of the main rate.

The growth of weighted average interest rates on time deposits from 14.8% in December 2020 to 17.8% in March 2021, served to increase their volume in the first quarter by 10.5%, including time deposits of individuals - by 13, eight%.

The weighted average interest rate on loans in March amounted to 21.4%, having decreased by 3.4 percentage points. compared to the corresponding period last year, formed at a higher level compared to December 2020.

Forecast and risks. 

Real GDP growth is expected to be in the range of 4.5-5.5% in the baseline scenario in 2021. At the same time, the forecasts updated taking into account the results of the first quarter show that the rates of economic growth will be close to the upper limit of this forecast corridor.

A recovery in aggregate demand amid continued fiscal stimulation of the economy this year and unchanged monetary conditions, as well as increased attraction of foreign direct investment as a result of structural reforms to liberalize the economy, will be the main factors supporting economic growth.

This year, the allocation of loans envisaged by entrepreneurship development programs will support economic activity in the regions, and the direction of funds within the framework of programs for providing the population with housing will become an incentive for the construction and related industries.

Also, the expected growth in the balance of credit investments in the economy at the level of growth in nominal GDP will not have a negative impact on financial stability indicators.

The Central Bank, taking into account the persistence of the impact of changes in foreign markets and the supply of basic food products on inflation until the end of the year, as well as the strengthening of the pro-inflationary impact of growth in aggregate demand, assumes the formation of an inflation forecast at the end of 2021 at the level of 9.0-10.0%. At the same time, inflationary processes and expectations until the end of the year will be formed under the influence of both monetary and non-monetary factors of multidirectional action.

As noted earlier, the invariability of regulated prices until the end of this year, the effect of a high inflation base in April and October last year, the formation of a relatively stable exchange rate of the soum in the IV quarter of 2020 and the first quarter of 2021, will be reducing factors of annual inflation in the coming quarters.

In turn, a significant increase in prices for some basic food products in the short term is explained, on the one hand, by a low harvest and an increase in prices in foreign markets due to restrictions imposed by some countries on food exports, on the other hand, by a high concentration of data imports. products, an undeveloped competitive environment and a relatively high cost of domestically produced products.

In the face of growing risks of rising food prices, the development of a unified state strategy for ensuring the country’s food security, reforms to diversify import markets, reduce import concentration and reduce transport costs will yield positive results in ensuring price stability in the domestic market.

In addition, the stabilization of food prices will be served by systematic work to increase the production of fruits, vegetables and fodder crops, as well as the allocation of land and water resources necessary for growing these products.

In general, a longer-than-expected persistence of risks, acceleration of inflation under the influence of internal and external factors, requires maintaining the current monetary conditions.

The Central Bank will continue to carefully study the nature of the formation of inflation factors and risks, and make appropriate decisions on the base rate, based on the forecast inflation dynamics.

The next meeting of the Board of the Central Bank to consider the base rate is scheduled for 10 June 2021.