Uzbekistan holds rate to lower inflation and expectations22nd April 2019
Uzbekistan’s central bank left its key refinancing rate unchanged at 16.0 percent, saying this moderately tight monetary policy would continue to curb inflation and consolidate the declining trend of inflationary expectations.
The Central Bank of the Republic of Uzbekistan (CBU), which has maintained its rate since a 200 basis point hike in September 2018, said it retained its forecast for inflation this year of 13.5-15.5 percent but would lower it for the first half of the year if it was confident inflation would decelerate.
Inflation in land-locked Uzbekistan, east of the Caspian Sea, was near the lower border of the central bank’s forecast in the first quarter of this year at 13.6 percent, lower than expected, with the main forces emanating from continued economic reforms, including an increase in energy tariffs for businesses in November 2018, an expansion in the number of firms paying value-added-tax (VAT) and a slight weakening of the national currency, the som.
Inflation in the second and third quarters of this year is is expected to be close to last year. In 2018 and 2017 inflation averaged 14.3 percent and 14.4 percent, respectively.
In the fourth quarter of this year the central bank expects a decline in inflation, partly due to the comparison with the fourth quarter of 2018, and inflation should approach the lower boundary of its inflation forecast.
Inflationary expectations by businesses and the public in the medium term remain higher than for the short term, showing some concern by respondents about a rise in prices, CBU said.
The exchange rate of the som has been depreciating gradually this year, after a sharp fall in September last year, and was trading around 8,455 to the U.S. dollar, down 1.4 percent this year.
Uzbekistan’s economy is in the midst of major economic reforms begun in 2016, with reforms so far including liberalization of foreign exchange, tax reform and an upgrade in the quality and availability of economic statistics.
Last week the central bank said it was implementing three major projects to upgrade the payment system, which in a few months will allow the interbank payment system to function 24 hours, 7 days a week in contrast to the current system which doesn’t permit financial transactions after 5 p.m. local time and on the weekends and holidays.
Economic activity in the first quarter of this year was in line with CBU’s forecast, with the growth of credit in som slowing to 8.6 percent from 16.7 percent in the first quarter of last year.
In March the International Monetary Fund (IMF) said excessive credit growth – mainly funded by the government – was a major risk to macroeconomic stability as rapid growth had helped finance a surge in capital imports and bolstered investment in housing and infrastructure following decades of underinvestment.
“Given persistent inflationary pressure, the monetary stance needs to remain tight,” IMF said last month, noting CBU aimed to bring inflation back to single digits and to facilitate the move to inflation targeting a new central bank law should provide CBU will sufficient independence to conduct its policies effectively.
The IMF expects growth in Uzbekistan to pick up to 5.5 percent this year, from 5.1 percent in 2018, and then 6.0 percent in 2020 and 2021. Despite lower commodity prices and slowing external demand, strong investment and private consumption should underpin growth.
IMF forecast inflation will hover around 15 percent this year, reflecting the delayed impact of energy price hikes for businesses in November last year, robust wage growth and projected increases in VAT collections as the number of firms paying VAT has risen significantly.
IMF forecast inflation will average 15.6 percent this year and then decelerate to 12.4 percent in 2020 and 9.1 percent in 2021.
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