Mongolia's central bank left its policy rate unchanged at 14.0 percent, saying the monetary policy outlook favors future changes to interest rates.
The Bank of Mongolia (BOM) lowered its rate by 100 basis points in December following a sharp 450 point hike in August to help stabilize the exchange rate of the tugrik and preserve international reserves and thus financial stability.
The central bank noted Mongolia's inflation rate rose to 2.1 percent in February from 1.9 percent in January and is expected to rise further but still remain low and below its target due to slow economic activity, with the strength of China's economy the main factor.
Mongolia's inflation rate tumbled to a negative minus 0.2 percent in August last year and remained negative until November as meat prices fell by one-quarter and household incomes fell.
But the central bank said recent changes, such as an extension of the US$2.2 billion swap line with the People's Bank of China, had eased the pressure on short-term foreign payments and had a positive impact on the economy although there is uncertainty regarding the external sector and the budget.
Last month Mongolia reached staff-level agreement with the International Monetary Fund (IMF) on an three-year extended fund facility that includes a $440 million loan to help avert default on a $580 million bond repayment due this month by the state-run Development Bank of Mongolia (DBM).
In addition, the Asian Development Bank, the World Bank and other countries, such as Japan and South Korea, are providing financial aid, boosting the total financing package to around $5.5 billion.
As part of the agreement with the IMF, Mongolia has agreed that the DBM will operate in an independent, commercial manner and the central bank will not engage in quasi-fiscal activity.
The IMF also said it expects the BOM to continue with an appropriately tight monetary policy, aiming for price stability and first cut rates if external factors and inflation permits. A new law governing the central bank will help strengthen its mandate, governance and independence.
In its December inflation report, the central bank forecast inflation will remain low but relatively stable this year, with deflation continuing until the third quarter due to slow economic activity and low meat prices while exchange rate depreciation will help push up import prices.