The Bank of Mongolia (BM) cut its rate by 200 basis points in June, its first cut this year and the second cut following 100 point cut in December 2016 as the bank unwinds a 450-point rate hike in August 2016 to stabilize the exchange rate of the tugrik and preserve international reserves.
Mongolia's inflation rate rose to 5.0 percent in August from 3.4 percent in July, in line with its target of keeping inflation below 8 percent for 2017 to 2019.
Economic growth in Mongolia in the first half of the year topped forecasts, with growth at an annual rate of 5.3 percent, the BM said in a statement issued on September 19 and based on a meeting by the monetary policy committee on September 15.
"Furthermore, economic growth is expected to accelerate and inflation is expected to stabilize around the medium term target rate of 8 percent," the BM said, adding the economy is currently stimulated by improved external demand, relatively high prices of major export commodities and increased investment in the mining sector.
While the bank noted the positive sentiment in financial markets and the economy, it added that "further prospects are highly conditional on export prices and volume."
The exchange rate of the tugrik has been depreciating since July as it reverses a rise in the first 7 months of the year. The turgrik was trading around 2,465 to the U.S. dollar today, up 0.6 percent since the start of this year.
In May the IMF approved a 3-year, $434 million loan to Mongolia as part of a total financing package worth $5.5 billion 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.
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.
The Bank of Mongolia issued the following statement:
"The Monetary Policy Committee meeting was held on 15 September 2017, and it was decided to keep the Policy rate unchanged at 12 percent.
As of August 2017, annual inflation measured by the consumer price index has reached 5 percent nationwide and 5.4 percent in Ulaanbaatar city. In the first half of this year, growth of the Mongolian economy exceeded forecasts and reached 5.3 percent (on annual basis). Furthermore, economic growth is expected to accelerate and inflation is expected to stabilize around the medium term target rate of 8 percent.
Mongolian economy is currently stimulated by improved external demand, relatively high prices of the major export commodities and increased investments in the mining sector. While the Bank observes positive changes in market sentiment and positive trends in economic activities, further prospects are highly conditional on export prices and volume.
The Bank’s decision to maintain the policy rate unchanged is consistent with its mandate to stabilize inflation around the target rate and thereby facilitate the stability of macroeconomic environment in the medium to long run.
Extracts of the meeting minutes will be released in two weeks on the Bank of Mongolia’s website."
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