Tashkent, Uzbekistan (UzDaily.com) -- The Center for Economic Research and Reforms has analyzed how a 1 percentage point reduction in the policy rate will affect the economy. According to estimates, the economy is expected to accelerate, the consumption of the population to grow and the volume of loans to increase.

On 16 March 2023, the Board of the Central Bank of Uzbekistan decided to reduce the policy rate by 1 percentage point (p.p.) - from 15% to 14%.

The last time the 14% rate was in effect at the beginning of 2018 and at the end of 2020. A year and a half later, in March 2022, the Central Bank raised the rate by three percentage points at once, to 17%.

Last year, the regulator twice reduced the rate to 16%, and at the end of July to 15%.

The rate cut will improve economic performance and stimulate economic growth. The Center for Economic Research and Reform (CERR) has assessed these effects.

The analysis showed that as a result of reducing the policy rate by 1 percentage point, the country’s GDP will increase by 0.55% compared to the baseline scenario.

In addition, a decrease in the nominal interest rate will reduce real interest rates and stimulate the growth of household consumption. The results of the CERR study show that the rate cut will increase the volume of loans issued to the population by 2.6%. As a result, the gross consumption of the population will increase by 0.2% compared to the baseline scenario.

It should be noted that, according to a study by the International Monetary Fund, a change in the policy rate by 1 p.p. leads to a change in lending rates by an average of 0.6 percentage points, and deposit rates by 0.35 percentage points.

Thus, lowering the policy rate will encourage commercial banks to lower lending rates and encourage private investment. The study showed that lowering lending rates would increase gross investment by 0.68%.

Experts believe that the reduction of the policy rate by 1 p.p. can increase the volume of loans issued by sectors of the economy as follows:

- by 3.6% in agriculture;

- by 2.8% in construction;

- by 2.7% in industry;

- by 1.3% in trade;

- by 1.1% in the field of transport and communications.

The study was conducted using the IS-LM model, which is common in international practice for assessing the impact of economic effects in the short term.