Wednesday, May 27, 2020

Kyrgyzstan holds rate as inflation seen easing after spike

     Kyrgyzstan's central bank, one of only five central banks to have raised interest rates this year, left its policy rate steady for the second time, saying inflation is expected to accelerate temporarily in the first half of this year but an expected weakening of demand will then restrain inflation in the medium term.
     The National Bank of the Kyrgyz Republic (NBKR) left its discount rate at 5.0 percent, as in March, after raising it in February by 75 basis points to curb inflationary pressures.
     The February rate hike was the first rate hike since September 2015 and it interrupted an easing cycle that began in March 2016 and resulted in rates being cut 575 basis points.
     Inflation in the Kyrgyz Republic jumped to 8.6 percent in April from 5.9 percent in March due to higher food prices in connection with a spike in demand ahead of the imposition of quarantine measures and a closure of its borders to combat the coronavirus.
     As of May 15, the central bank said inflation had eased to 7.5 percent, but this was still above its inflation target 5.0 to 7.0 percent.
     The restrictions imposed to combat the pandemic led to a decline in production in almost all sectors of the country's economy, especially the services sector, construction and industry, and this trend is expected to continue in the short term.
     Domestic consumption will also be limited by lower export earnings and remittances from workers abroad, NBKR said.
     This decline in domestic demand will curb inflationary dynamics in the medium term after a temporary acceleration of inflation in the first half of this year.
     The domestic foreign exchange market has remained balanced and so far NBKR said it had not intervened this month.
     NBKR is in the process of transitioning to a monetary framework based on inflation targeting to ensure price stability as a basis for long-term economic growth.
     In mid-March the Kyrgyzstan's som tumbled 18 percent to 84.9 to the U.S. dollar by April 4, but since then it has rebounded to trade at 74 to the dollar today, down 5.5 percent this year.
     On May 8 the International Monetary Fund (IMF) approved a second release of funds to help  Kyrgyzstan meet what it said were "urgent" balance of payment needs and catalyze donor support.
     On March 26 the IMF also offered the country emergency assistance and total disbursements to the country amount to US$ 242.0 million.
     "The COVID-19 pandemic has hit the Kyrgyz economy very hard and increased an already urgent balance of payments need," the IMF said earlier this month, estimating the gap of some US$ 500 million.
    The IMF funds are aimed at helping finance health and economic relief but IMF added expeditious additional donor support is needed to close the balance of payments gap.


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