Mongolia's central bank cut its policy rate by 200 basis points to 12.0 percent, saying inflation had now stabilized around its target and uncertainty surrounding its economy had eased following the International Monetary Fund's support package.
It is the first rate cut by the Bank of Mongolia (BOM) this year but the second cut after a 100 point cut in December last year. I
In August 2016 BOM hiked its rates by 450 basis point rate to stabilize the exchange rate of the tugrik and preserve international reserves and thus financial stability.
In addition to the rate cut, the central bank said it had also narrowed its interest rate corridor to 2 percentage points, plus and minus.
Mongolia's inflation rate rose to 3.7 percent in May from 3.4 percent in April, continuing to slowly rise after inflation turned negative from August through October last year due to slowing economic activity.
The central bank targets inflation below 8 percent for 2017-2019, up from 7 percent for 2016 and 2015, but similar to the 8.0 percent target in 2013 and 2014. In 2012 it targeted 10 percent inflation.
The exchange rate of the tugrik has appreciated steadily this year and was trading around 2,364 to the U.S. dollar today, up almost 5 percent since the start of this year.
Last month the IMF approved a 3-year, $434 million loan to Mongolia as part of a wider $5.5 billion financing package that was supported by Japan, Korea, China, the World Bank and the Asian Development Bank, the fourth-largest package in IMF history.
The package supports the government's economic recovery program that is aimed at building foreign exchange reserves, putting debt on a sustainable path, strengthening the banking sector and securing sustainable growth.
With minerals, such as copper and coal, accounting for 90 percent of Mongolia's exports, the country was hit hard by the sharp drop in commodity prices and a slowdown in export markets.
"Efforts to mitigate these shocks through expansionary policies were unsuccessful and resulted in unsustainable public debt, falling international reserves, and lower growth," the IMF said in May, adding that the fiscal deficit and currency depreciation together pushed government debt up to nearly 90 percent of Gross Domestic Product.
BOM said today that fiscal measures and the joint program with the IMF had helped revive credit and the rate cut should help support economic growth and business activity, employment and financial stability.
Mongolia's Gross Domestic Product grew by an annual rate of 4.2 percent in the first quarter of this year, up from 1 percent in the fourth quarter of last year and a contraction of 1.6 percent in the third quarter of 2016.
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