Wednesday, April 15, 2020

Uzbekistan cuts rate 1st time in 5 yrs on falling inflation

     Uzbekistan's central bank lowered its benchmark refinancing rate by 100 basis points to 15.0 percent, its first rate cut since January 2015, saying inflation is falling faster than expected due to lower oil prices and a fall in demand from measures to contain the spread of the coronavirus.
     The Central Bank of the Republic of Uzbekistan (CBU) shifted into a tightening mode in June 2017, raising its rate by a total of 700 basis points by September 2018, after the exchange rate of the som tumbled, helping push up inflation to an  all-time high of 17.5 percent in 2018.
      At the same time consumer prices were rising in response to the deregulation of many prices as the former Soviet republic transitions to a market economy.
     The decline of the som, which became convertible in 2003, slowed in the last two years and inflation slowed to 14.5 percent in 2019, with the result CBU in January this year said it was getting ready to ease its policy.
     In March CBU maintained its policy rate due to the uncertainties of the interplay between further price liberalization and the impact of Covid-19.
      Today's rate cut came the week before the bank's scheduled meeting on monetary policy on April 23, with the next policy meeting scheduled for June 11.
     In the first quarter of this year Uzbekistan's inflation rate slowed faster than expected to 13.6 percent, 0.5 percentage points below CBU's forecast, and inflation is now expected to fall to 11.0 to 12.5 percent by the end of the year compared with earlier forecasts of 12.0 to 13.0 percent.
     The decline in inflation is due to lower external and internal economic activity, which will lower demand for those goods that are not essential, zero percent custom duties and excise taxes on imports of basic consumer goods and raw materials until the end of this year to prevent a rise in the prices of those goods that are in high demand during the quarantine, and a delay in the next rise in planned energy price hikes in the context of price reforms due to lower energy prices.
     Although there will be a temporary increase in prices of some consumer essentials, new agricultural crops in coming months along with government measures to ensure food security will help stabilize prices, factors that will help ease the negative impact on prices from a decline in the som's exchange rate.
     The som fell almost 4 percent in response to the rate cut, trading at 10,090 to the U.S. dollar and is now down 5.8 percent this year.
     Given the high uncertainty around the duration of the pandemic and its impact on the global economy, the central bank said it was still analyzing the impact on the country's economy this year and would present results after the analysis has been completed.
     However, it has noticed a 6 percent drop in the number of transactions in the banking system in March from last year while the volume of transactions through payment terminals fell 25.9 percent in the first 10 days of April compared with the same period in March.
     Lending activity has also slowed, with the growth in the balance of loans to the economy by commercial banks down 3.5 percentage points in the January to April period to 7 percent.
     CBU began the process of transitioning to an inflation targeting regime at the start of this year, with the aim of lowering inflation to 10 percent in 2021 and then reaching the longer term goal of 5 percent inflation in 2023.
     As part of a new central bank law that was adopted in November 2019, CBU has also been given a broader supervisory role over the banking system and by April 1 this year it will be issuing economic forecasts in line with international practices.


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