Friday, December 20, 2019

Mongolia maintains rate but raises FX reserve ratio

    Mongolia's central bank kept its policy rate at 11.0 percent but raised the mandatory foreign currency reserves ratio by 300 basis points to 15.0 percent to maintain the relative yield of the tughrik and reduce the fluctuations in its exchange rate.
     The Bank of Mongolia (BOM), which has kept the rate steady since raising it by 100 basis points at an unscheduled monetary policy meeting in November 2018 to bolster the tughrik, said it had discussed lowering the interest rate in light of slowing economic growth but decided not to change the rate at this point given uncertainty over the government budget and the external environment.
     The tughrik has been depreciating since April 2018 and fell 8 percent last year amid growing external deficits, a fiscal deficit, and the impact of China's decision to limit coal imports.
     This year the depreciating has slowed as inflation has stabilized and begun to decline while global interest rates have dropped.
     Today the tughrik was trading at 2737 to the U.S. dollar,  down 3.7 percent this year.
     Mongolia's inflation rate fell to 5.2 percent in November, the lowest since August 2017, from 7.6 percent in October, and below BOM's current target of 8.0 percent.
      Mongolia's economy was hit hard in 2016 when foreign investment collapsed after a fall in the prices of its major exports of coal and copper.
     The following year the International Monetary Fund (IMF) and Mongolia agreed on a 3-year, $425 million loan as part of a total financing package worth $5.5 billion that was supported by Japan, South Korea, the World Bank and the Asia Development Bank.
     This helped Mongolia's economy recover last year, with the fiscal balance turning into a surplus and international reserves rising.
     "Notwithstanding this progress, Mongolia remains vulnerable to external shocks given its high debt levels and the economy's dependence on mineral exports," IMF said in September, adding the country's economic outlook remains strong despite headwinds.
     Mongolia's economic growth rate declined to 6.3 percent in the first nine months of the year from 7.3 percent in the first half and BOM said growth is expected to slow due to the uncertain environment and slowing growth in investments.
      But budget expenditures and rising salaries from continuing large investment projects should support domestic demand next year and export prices remain at a relatively favorable level, BOM said.
     IMF forecast in September 2019 growth would remain above 6.5 percent and then moderate to around 5-6 percent in the medium term.
     Earlier this month Mongolia's parliament, known as the State Great Khural, approved the 2020 monetary policy guidelines, with BOM tasked with stabilizing consumer price inflation at 20 percent in 2020 and around 6 percent in the medium term.
     At some point in the future stable inflation will become BOM's monetary policy target, the parliament also decided.
   
     www.CentralBankNews.info

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