Tashkent, Uzbekistan (UzDaily.com) -- On 11 March 2021, the Board of the Central Bank decided to keep the basic rate unchanged, at 14.0% per annum.

This decision was made in order to continue the current course of monetary policy aimed at achieving an interim inflation target below 10% in annual terms in 2021 and a sustainable recovery in economic activity, as well as creating conditions for reducing inflation expectations.

Inflation and inflation expectations

In January-February 2021, the inflation rate accelerated slightly and amounted to 11.6% and 11.4%, respectively, under the influence of seasonal factors and rising food prices.

Growth in food prices continues to make the largest contribution to overall inflation. The annual growth in prices for this group remained significantly higher than the general level and amounted to 14.6%, increasing the headline inflation by 6.19 percentage points.

From this group in January-February, the most significant pro-inflationary impact was exerted by the rise in prices for sugar, vegetable oil, poultry, as well as fruits and vegetables. In particular, sugar rose by 3.7%, vegetable oil - 3%, poultry - 5.7%, fruits and nuts - 5%, vegetables and legumes - 3.2%.

In the short term, pro-inflationary pressures from the external sector are expected to prevail and world food prices continue to rise for almost a year.

At the same time, in the first months of 2021, a slight acceleration in the growth of prices for non-food products and services was also recorded. The increase in prices for these groups of goods is mainly due to the effects of market adjustment of tariffs for water supply in the regions since the beginning of the year, the indexation of the excise tax on tobacco and alcoholic products, and an increase in gasoline prices due to an increase in oil on world markets.

Since the beginning of the year, inflationary expectations of the population and business entities have relatively decreased to 16.3% and 17%, respectively, but remain higher than the actual and forecasted inflation indicators.

According to the results of recent surveys, respondents among the population note the most noticeable increase in prices for food products, medicines, utilities and gasoline. At the same time, business entities noted an increase in prices for raw materials, transport and utilities as the main factors in the growth of production costs.

Economic activity. 

In January-February of this year, the most of the industry indicators showed positive growth rates, but still have not reached the level of the corresponding month of the last year.

Surveys conducted among enterprises show a certain recovery in economic activity in February after the January decline under the influence of seasonal factors. Nevertheless, the value of the February economic activity index formed below the December 2020.

The decrease in activity in January was mainly observed in the spheres of construction, industry and trade. In February, activity in the areas of trade and services improved significantly, which after a certain time may have a positive effect on the recovery of the industry.

At the same time, there has been an increase in the index of business sentiment, in all areas of activity the economic expectations of enterprises have improved for three months in advance.

In addition, the operational indicators of economic activity in February also showed positive trends.

The demand for financial resources in the form of loans and foreign currency is recovering. During January-February of this year the volume of loans allocated by commercial banks amounted to 18.8 trillion soums with a slight increase compared to the corresponding period of 2020 (18.7 trillion soums).

The volume of purchases of foreign currency for the import of goods and services approached the pre-quarantine indicators and reached US$1.72 billion.

The total turnover of the Republican Commodity and Raw Materials Exchange in February increased by 26.5% compared to January of this year. and 1.6 times compared to the corresponding month of last year. The total number of transactions through the interbank payment system in February also increased by 19.6% compared to the previous month.

Against the background of the recovery in external demand, export earnings (excluding gold) during January-February increased by 8% compared to the corresponding period last year and reached US$1.4 billion. At the same time, in February, export earnings amounted to US$743 million, having increased by 13% compared to January of this year.

The inflow of cross-border remittances in January-February of this year amounted to 892 million dollars, which is 14% more than the same period in 2020.

These factors contributed to the maintenance of supply in the domestic foreign exchange market, as a result of which the exchange rate of the national currency was formed more stable and as of 1 March 2021, the level of devaluation since the beginning of the year was 0.6%.

Monetary conditions.

In January-February 2021, the economy maintained positive real interest rates. The weighted average interest rate of the interbank money market in February was 14.4% and was formed within the interest rate corridor with a positive spread to the main rate, the UZONIA indicator was at about 14%.

At the beginning of the year, there was a relatively stable increase in the volume of money market transactions. In particular, in February this figure increased by 23.1% compared to the previous month, amounting to 11.5 trillion soums.

After a downward trend in the second half of 2020, rates on deposits of individuals in national currency in February 2021 rose to 18.3%, and for legal entities - to 16.8%. Weighted average rates on loans in national currency in February of this year accounted for 21.3%.

After the cancellation of the mechanism of acceptable rates from January 1, 2021, in January-February of this year. there has been a definite upward adjustment in interest rates. However, rates were formed much lower compared to the corresponding period last year, reflecting changes in monetary conditions.

Also, in recent months, there has been a certain fiscal consolidation as a result of a relative normalization of the situation and a decrease in spending on anti-crisis measures.

Forecasts and risks. 

According to the baseline forecast of the Central Bank, inflation will slow down to 9.0-10.0% by the end of 2021. The restraining influence on the inflation rate until the end of the year will be exerted by:

maintaining relatively tight monetary conditions from Q4 2020;

gradual exhaustion of the effect of quarantine measures and the effect of a high base formed as a result of increased price increases in March-April 2020;

fading pass-through effect on prices of a sharp devaluation of the soum exchange rate in April 2020.

Improving the efficiency and scale of measures taken to diversify and reduce concentration in import markets will contribute to price stability and reduce pro-inflationary risks in the medium term.

At the same time, there are still risks associated with the possibility of one-off inflationary factors, as well as a more rapid recovery in demand in the context of a relative limited supply of goods and services, the introduction of quotas and duties on the export of certain types of food by countries exporters of basic food products.

At the same time, there is a likelihood of the transfer of increases in fuel and transportation costs to commodity prices, as well as the pro-inflationary impact of higher excise taxes on certain types of goods and seasonal increases in food prices, in the period between the depletion of stocks and the arrival of a new crop on the markets.

In the coming months, significant growth is expected in the construction sector compared to last year, which may serve as a factor in the growth of prices for cement and other building materials.

In this regard, it will be important to take timely measures to increase the volume of goods and services in the domestic market and increase competition in certain product markets.

In general, the risks of accelerating inflation under the influence of internal and external factors continue to prevail. The balance of disinflationary and pro-inflationary factors determines the preservation of the current monetary conditions.

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 base rate based on the dynamics of the inflation forecast.

The next meeting of the Board of the Central Bank to consider the base rate is scheduled for 22 April 2021.