Wednesday, February 24, 2021

Kyrgyzstan raises rate as food prices boost inflation

      Kyrgyzstan's central bank, one of only a handful of central banks to have raised interest rates in 2020, returned to the monetary tightening path by raising its key interest rate for the second time in exactly 12 months as higher food prices push up inflation at the same time economic activity is strengthening.
      The National Bank of the Kyrgyz Republic (NBKR) becomes the sixth central bank to raise interest rates this year as policy makers slowly, but steadily, unwind last year's unprecedented easing in response to the outbreak of the COVID-19 pandemic when benchmark interest rates were cut 256 times worldwide.
     NBKR raised its discount rate by 50 basis points to 5.50 percent, returning the rate to a level last seen in November 2016.
     Starting in March 2016, Kyrgyzstan's central bank shifted into a monetary easing cycle when it began cutting its rate from 10.0 percent. 
     But this easing cycle came to an end one year ago on Feb. 24, 2020 when the central bank, which is transitioning to a monetary framework based on inflation-targeting to ensure price stability, raised the rate to dampen inflationary pressures.
     "A gradual recovery of the economies of trading partners is expected, which will contribute to an increase in economic activity in the republic to meet external demand in the medium term," NBKR said,.
     It did not exclude the possibility of additional changes to its monetary policy.
     Inflation in the former Soviet republic - tucked between which China, Kazakhstan, Tajikistan and Uzbekistan - had trended lower since topping 20 percent in 2007 but in the last five months it has accelerated and rose to 10.1 percent in January, up from 5 percent in August last year.
     As of Feb. 12, inflation rose further to 10.2 percent, mainly due to the higher cost of imported food.
     "The rise in prices on world food markets continues and, as a result, there is an increase in inflation in the country," NBKR said, adding the rise in commodity markets will determine how persistent inflation will rise in the near future.
     Food inflation rose to 18.5 percent in January from 9.4 percent in August and 17.6 percent in December and a planned increase in taxes on alcohol and tobacco this quarter will push up prices further.
     "It is expected that, after some acceleration, by the middle of the year inflation will gradually stabilize and be within single digits by the end of the year," the bank said.
     Kyrgyzstan's economy shrank 8.6 percent in 2020 after growth of 4.5 percent in 2019 and while domestic demand remains weak, NBKR said the economy was recovering at "a moderate pace," helped by remittances from workers abroad which rose 2.0 percent to US$1.9 billion by the end of last year.
     After tumbling in March last year Kyrgyzstan's som rebounded in the following months but since June it has steadily depreciated, with the central bank saying the foreign exchange market is relatively stable but it participates in the market to smooth out sharp fluctuations in the exchange rate.
     The som was trading at 84.63 to the U.S. dollar today, down 2.1 percent since the start of this year and down 17.6 percent since the start of 2020.


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