The Central Bank of Uzbekistan decided to keep the main interest rate unchanged at 14% annually during its meeting on April 25.
According to the regulator, the impact of fundamental monetary factors on inflation processes in the economy is gradually decreasing. However, the increase in gas and electricity tariffs starting from May 1 "may have a one-time impact on overall inflation."
The overall inflation rate continued to decrease since the beginning of the year, reaching 8% in annual terms in March. There was a significant decrease in food inflation. Analysts at the Central Bank note that the dynamics of prices in external food markets had a diminishing effect on imported inflation.
Inflation in the services sector has been steadily rising in recent months due to sustained high demand in the economy and the increase in some regulated prices and tariffs.
The core inflation significantly slowed down, standing at 7.6% in annual terms in March, forming below the overall inflation level since the beginning of the year.
Public and entrepreneurial inflation expectations remain higher than the current and forecasted inflation levels. The Central Bank expects that the dynamics of inflation expectations may increase due to the rise in energy prices and the introduction of VAT on a range of goods and services.
Considering this, the Central Bank raised the forecast for overall inflation under the main scenario in 2024 from 8-9% to 9-11%.
"The wider range of the forecast corridor is due to the complexity of assessing the effect of tariff increases on inflation expectations of the population and entrepreneurs, given the presence of mitigating measures such as one-time payments to the population, as well as social norms and a two-month grace period," the statement said.
It is expected that core inflation will remain on a stable declining trajectory and is projected to be around 7-8% by the end of the year.
The Central Bank updated its inflation forecast as the growth in regulated prices turned out to be higher than initial estimates (a growth of 20-25% was forecasted, while prices actually increased by at least 52.5-71%). However, the regulator believes that the impact of these changes on prices in the economy is one-off and will not significantly affect the downward trend in inflation in the medium term due to a certain degree of reduction in consumer demand.
Additional government measures aimed at increasing aggregate supply in the economy and reducing inflation, as well as the accumulated effect of a prolonged period of relatively tight monetary conditions, will help restrain inflationary processes, the Central Bank is confident.
GDP Growth
According to preliminary data, in the first quarter of 2024, the pace of economic growth accelerated to 6.2%. High growth rates were observed in the services sector, retail trade, and construction, and there was also increased investment activity in manufacturing and mining industries.
The demand for labor in the labor market is significantly increasing. However, there is a certain segmentation in the labor supply, and it is observed that the demand is not fully satisfied in highly skilled sectors, leading to higher wage growth in the respective industries.
The dynamics of the real effective exchange rate of the sum weakened by 0.9% since the beginning of the year, forming within the long-term trend. Considering the forecasts for currency exchange rates and inflation of foreign trade partners, there is relatively no pressure on the real effective exchange rate.
According to the updated forecasts, by the end of the year, GDP growth is expected to be within 5.2-5.7% (previously 5.5-6%). The update in the economic growth forecast is associated with more moderate consumer demand in the future, due to structural changes in household and entrepreneurial expenditures.
At the same time, high activity in private investments, fiscal stimuli, and the growing dynamics of household incomes, as in previous years, will be factors supporting economic growth this year, noted the regulator.
Monetary Policy
The level of stringency of current monetary conditions is reflected in the gradual balancing of the volumes of financing the economy and the acceleration of deposit growth through ensuring positive real market rates, according to the press release.
It is expected that in the coming quarters, the overall liquidity of the banking system will gradually transition from a structural surplus state to a structural deficit phase, and these structural changes will be adjusted through monetary operations.
According to estimates, with the upper boundary of the inflation forecast (11%), monetary conditions that limit the impact of monetary factors on inflation and stimulate savings in the national currency will also be maintained.
However, risks are increasing in terms of achieving the forecast for core inflation, and in case of a significant increase in inflation expectations of the population in the near future, appropriate measures will be taken to adjust monetary conditions.
When implementing a moderately tight monetary policy aimed at achieving the 5% inflation target, the Central Bank will pay special attention to balancing demand and supply in the economy, inflation expectations, and the pace of structural reforms.
