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The Board of the Central Bank lowered the base rate by 1 pp. up to 14% per annum

This decision is due to the strengthening of the prerequisites for a further slowdown in the forecast inflation dynamics, the need to maintain moderately positive real interest rates in the economy, as well as to achieve a balance between the inflation target and maintaining economic activity in a pandemic.

At the same time, the absence of pronounced pro-inflationary factors on the forecast horizon gives monetary policy room for mitigation without future risks to inflation.
The Central Bank maintains its forecast for inflation at the end of the year at the level of 11-12.5% with an increase in the probability of its formation closer to the lower boundary of the forecast corridor. With a steady decline in inflationary expectations and maintaining macroeconomic stability, this forecast may be revised downward.

The Central Bank, together with the Government, will take all necessary measures to achieve the constant inflation target of 5% by 2023.
Inflation and inflation expectations. The dynamics of inflation for 8 months of 2020 is formed under the influence of the deferred decision to increase tariffs for electricity and gas, the economic effects of quarantine restrictions on domestic demand as a result of lower incomes of the population and a decrease in employment, as well as the absence of devaluation pressure, since the weakening of the national currency in April was offset by the subsequent stabilization of the national currency.The annual inflation rate in January-August of this year slowed down to 11.6% from 15.2% at the end of 2019 and was below the specified trajectory of the inflation target, which is due to the persistence of regulated prices unchanged, seasonal decline in prices for fruits and vegetables and moderate lending rates to the economy compared to last year.

In the structure of annual inflation, prices for non-food products (8%) and services (7.5%) had a downward impact on overall inflation, while food prices (16.8%) grew at a higher rate due to increased demand for this group of goods in a pandemic.The level of core inflation in July-August also had a deceleration trend similar to the general inflation, and according to the results of the first eight months of this year. amounted to 12.2%.

Inflationary expectations of the population and business entities for the next 12 months have significantly decreased after a moderate growth in July of this year. However, the gap between inflation expectations and actual inflation remains significant since March of this year.
The results of the survey show that respondents associate the rise in prices in the coming months, first of all, with the consequences of the pandemic and the rise in prices for goods and services of entities holding a monopoly position in the market.

Economic activity. Economic recovery is expected to be gradual as the quarantine shock wears off. However, the return to the pre-crisis level will be more protracted in time due to the relatively low growth in the population’s income, as well as the more cautious behavior of economic agents when making decisions.After the outlined trend towards a gradual recovery in economic activity in May-June, in the period July-August there was a slight decrease in a number of indicators.

Construction volume growth slowed moderately to 105.7% from 107.3% in January-June. The total number of all transactions through the bank payment system in July and August decreased by 8% and 9% versus June, respectively.
Despite the fact that most of August fell on the quarantine period, there was a slight recovery in the growth of cash receipts from trade and paid services after their decline in July by 11.9% compared to June (from 12.6 trillion soums to 11.1 trillion soums). Thus, cash receipts in August increased by 6%, reaching the last year’s level for the same month.Monetary conditions. Despite the main rate cut in April 2020, the economy remained moderately tight in monetary conditions.

In July-August, against the background of easing requirements for mandatory reserves of banks and active monetary operations by the Central Bank, there was a significant decrease in interest rates in the interbank money market, including on deposits for longer periods.

At the same time, interest rates on deposits up to 14 days in the last two months were formed within the interest rate corridor of the Central Bank.
In July this year, under the influence of the activation of an acceptable interest rate policy, there was a significant decrease in interest rates in the economy, both on deposits and loans.

Interest rates on deposits in national currency for individuals in July of this year decreased to 18%, and on deposits of legal entities – to 15.2%. It should be noted that despite the decrease in nominal interest rates, real interest rates on deposits remained at a positive level. At the same time, the growth in the volume of deposits in the banking system in January-August of this year. amounted to 13.6%.
Interest rates on loans in national currency decreased to 20.6%. At the same time, interest rates on loans to business entities decreased from 24.3% at the beginning of the year to 19.5%, and on loans to the population from 28.1% to 22.3%.

The dynamics of the exchange rate of the soum was formed against the background of the deterioration of the general economic situation in the world economy, a decrease in foreign exchange earnings and the weakening of the currencies of the main trading partners. As a result, after the depreciation of the exchange rate by 5.8% in April of this year. in May-August, the exchange rate remained relatively stable and the level of devaluation in January-August was about 8%.
At the same time, the formation of the national currency rate is expected to be close to its fundamental trend and without serious fluctuations in the real effective exchange rate.

Inflation risks. In the short term, the economy is not expected to be dominated by pro-inflationary factors.

This is primarily due to the preservation of tariffs for electricity, utilities, public transport and other regulated prices unchanged until the end of this year.
In addition, weaker demand from the population, especially for non-essential goods, amid uncertainty about future incomes, the desire to optimize costs, and, possibly, a change in consumer preferences, will contribute to the slowdown in inflation.

The negative output gap, as well as the exhaustion of the effect of last year’s increase in prices for wheat flour and bakery products by the end of the year, will also contribute to lower inflation.
At the same time, risks of upward pressure on prices associated with the gradual lifting of quarantine restrictions and a greater than expected realization of deferred consumer demand, in particular, for food products – meat and other food products, seasonal price increases for medicines, vegetables and fruits in the autumn-winter period.

The next pivotal meeting of the Board of the Central Bank to consider the base rate is scheduled for October 22, 2020.