In Uzbekistan, the main interest rate has been reduced by 1 percentage point – up to 16% per annum.
According to the Central Bank, the decision to cut the rate was made against the backdrop of a gradual fading of negative short-term effects from external economic shocks, stabilization of the domestic foreign exchange market, recovery of foreign exchange flows and positive dynamics of fixed-term deposits in the national currency.
According to the main directions of the monetary policy, the monetary conditions characterizing the “moderate rigidity” of the market provide for real positive interest rates at the level of 2-3%, and the “hard” phase – at 4-5%. In April-May, real positive interest rates formed at the level of 6-7%, which led to the achievement of the upper limit of the rigidity level.
External economic conditions
The country’s economy has gone through short-term negative waves caused by the deterioration of the economic situation among trading partners, and contrary to initial estimates, it has been showing positive trends in the past two months.
In particular, the rapid recovery in the volume of foreign trade transactions and remittances increased the supply of foreign currency in the domestic market, which contributes to the strengthening of the national currency.
In January-March of this year, the republic received an average of $490 million in money transfers per month, while in April-May this figure reached $1.3 billion. Similarly, monthly export earnings increased by 1.3 times compared to January-March, and the volume of funds realized in the domestic foreign exchange market due to export earnings – by 1.4 times.
The soum exchange rate against the US dollar peaked in the first half of March 2022, depreciating by 6.8% compared to the beginning of the year, after which it appreciated by 5.1% from the second half of March. As a result, since the beginning of the year, the weakening of the soum amounted to only 1.6%.
In general, at the end of May, the real exchange rate of the soum approached its long-term trend (strengthened by 2% compared to September 2019) and demonstrates dynamics that do not have a negative impact on external competitiveness.
At the same time, in order to prevent a sharp strengthening of the soum against the dollar in the short term, in April-May, the Central Bank, taking into account the “principle of neutrality” of gold and foreign exchange reserves, purchased foreign currency in the domestic market in the amount of 523 million dollars.
In general, since the beginning of the year, the amount of failed interventions in the domestic foreign exchange market amounted to about $1 billion, which in the future will serve as an additional source of ensuring exchange rate stability.
At the same time, a high degree of macroeconomic uncertainty and risks remain in the global economy until the end of the year.
Economic activity
In recent months, there has been a slight slowdown in the activity and rates of lending by commercial banks to the economy.
At the end of May 2022, the annual growth of the balance of loans to the economy amounted to 17.4%, having formed below the expected growth rate of nominal GDP.
Also, if in the first quarter of this year the volume of loans to the economy increased by 13.6% compared to last year, then in January-May the growth rate slowed down to 8.8%.
According to the observations of the Central Bank, over the past two months, a decrease in the activity index was recorded in the sectors of the economy from 54 points in March to 53 in May. The decline was observed mainly in services and trade.
Domestic Price Dynamics and Inflation Expectations
According to the results of May, the annual inflation rate amounted to 11% and is within the forecast trajectory.
At the same time, the annual growth in prices for non-food products amounted to 10.3%, and prices for services – 6.2%, which is lower than general inflation. The price level in the food group takes on the character of growth in accordance with prices in foreign markets.
At the end of May, core inflation reached 10.4% year on year. The contribution of core inflation to headline inflation slightly decreased compared to the corresponding period last year and amounted to 7.8 percentage points.
It should be noted that while the seasonal decline in prices in the group of vegetables and fruits slows down the overall inflation, growth is observed in some segments of the main food and non-food products.
The emerging inflationary processes are more related to supply factors, reflecting the negative impact of the current geopolitical situation in the region on the supply of goods and transport and logistics processes.
In addition, if in April of this year there was a decrease in inflationary expectations among the population and business for the next twelve months, then in May there was an increase against the background of the expected effect from changes in regulated prices.
The inflation forecast for the end of this year was left unchanged at the level of 12-14%. This forecast takes into account both a further decline in prices for fruits and vegetables in the summer months and a smaller effect from the pass-through of the exchange rate into prices against the background of the strengthening of the national currency, as well as the expected liberalization of tariffs.
In order to stabilize prices, the Government is taking measures to increase the supply of products in the domestic consumer market, overcome logistical difficulties, and also meet the demand for basic consumer goods through alternative sources of imports.
Monetary conditions
In April-May of the current year, the average interest rate on money market transactions formed at the level of about 18%, which serves to ensure “tight” monetary conditions in the market of short-term financial resources.
The proposed interest rates on time deposits in the national currency (21-23%) are formed with a positive gap to inflationary expectations of the population and ensure the attractiveness of savings in the national currency. The temporary decrease in the growth rate of deposits in the national currency, observed in March of this year, completely changed to growth in April-May, and the volume of fixed-term deposits of the population increased by 22.4% compared to the beginning of the year.
At the same time, in the last two months there has been a rapid increase in the volume of cash in circulation. This is mainly due to an increase in the volume of sales by the population to banks of foreign currency received through cross-border money transfers and the payment of one-time social benefits. In particular, over the past five months, the positive gap between the purchase of foreign currency by banks from the population and its sale to the population amounted to $1.5 billion.
Interest rates on loans in the national currency formed on average in the range of 22-23%.
Macroeconomic expectations
It is expected that foreign exchange flows into the country through export earnings, remittances and foreign direct investment will support the supply of foreign currency in the domestic market and serve to stabilize the exchange rate in the short and medium term. Exchange rate stability, in turn, will play a role in mitigating the impact of “imported inflation” on prices.
Until the end of the year, in order to increase the attractiveness of assets in the national currency by ensuring positive real interest rates in the economy and achieving an effective transfer of monetary policy decisions to the economy by regulating the overall liquidity of the banking system, the following will be done:
– “overnight” deposit transactions and two-week deposit auctions aimed at attracting liquidity can be carried out without restrictions;
– limits on the average monthly balance of short-term bonds issued by the Central Bank were increased to 25 trillion soums;
– the yield limit of the bonds of the Central Bank purchased by commercial banks at auctions will be kept at the level of the upper limit of the interest rate band of the main rate.
The next key meeting of the Board of the Central Bank to consider the main rate is scheduled for July 21, 2022.
