The Central Bank of Uzbekistan decided to decrease the policy rate by 0.5 percentage points to 13.5% per annum on July 25. This decision follows recent economic data showing a decline in core inflation and inflation expectations.
Inflation and economic conditions
In June 2024, the headline inflation was 10.6% y/y. This decrease includes reductions in persistent inflation components and fruit and vegetable prices. Additionally, external market price trends have continued to reduce imported inflation.
Food inflation has decreased, and the stability of the exchange rate has led to lower inflation expectations among households. This development has reduced inflationary pressure from expectations.
Core inflation decreased to 5.9% in June, a reduction of 2.6% since the beginning of the year. This decline is attributed to a lower-than-expected secondary effect from energy tariff changes, suggesting a continuation of the downward trend in inflation.
The economy grew by 6.4% in real terms in 1H24. Key sectors contributing to this growth include manufacturing, construction, and services. Investment activity, particularly foreign direct and private capital investments, has been a significant factor in the increase in gross investment demand.
Despite a recent decline in economic activity and business sentiment, the indicators remain positive. The real GDP growth forecast for the end of the year has been adjusted to 5.7-6.2%.
Consumer demand and monetary policy
Consumer demand is expected to moderate due to changes in household and business expenditures. Maintaining relatively tight monetary conditions will help balance aggregate demand and supply, with the positive output gap of 0.5-0.6% expected to close by the end of the year, which will reduce its effect on inflation.
Export revenues and remittances are projected to exceed previous forecasts due to strong economic performance in major trading partners and favorable global market prices. Increased foreign currency inflows in the second quarter have stabilized the soum exchange rate.
Future outlook
Liquidity in the banking system and trends in savings and loans indicate that monetary conditions remain tight. This environment is likely to promote growth in household savings.
Uncertainties remain regarding inflation expectations and pro-inflationary risks related to high core services inflation. The Central Bank will continue a tight monetary policy to achieve the 5% inflation target. Future policy rate adjustments will depend on inflation trends, forecasts, and macroeconomic data.
The next review of the policy rate by the Central Bank’s Board is scheduled for September 12, 2024.
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