The National Bank of Tajikistan (NBT) cut its refinancing rate by another 100 basis points to 10.75 percent and has now cut it by 200 points this year following a similar-sized cut in April.
But the refinancing rate is only 150 basis points below the start of this year as NBT in January raised its rate by 50 points due to rising inflationary pressures.
The central bank said inflation in Tajikistan - which borders China, Kyrgyzstan, Afghanistan and Uzbekistan - was 8.4 percent in June, down 0.3 percentage points from June 2019 after rising earlier this year due to a rise in the prices of basic food items as the outbreak of the virus caused a supply shortage of some items amid a low level of domestic competition and limited international trade.
NBT targets inflation of 7.0 percent, plus/minus 2 percentage points and inflation eased to 10.0 percent in May from 10.6 percent in April.
To help meet the needs for some imports, such as flour, wheat, sugar, oil, fuel, medicine and fertilizers, the NBT approved the use of 104.3 million somoni from the international reserves.
This move helped ease some of the pressures on the exchange rate, the central bank said, along with the price level and since May prices and the exchange rate have been relatively stable.
The exchange rate of the somoni, which replaced the Tajikistani ruble in 2000, has been depreciating since 2014 and on March 30 the central bank made what it said was a one-time correction in the official exchange rate to the U.S. dollar of up to 5 percent to ease market pressure.
Today the somoni was trading at 10.2 to the dollar, 4.9 percent below its level at the start of 2020.
Tajikistan's economy grew 3.5 percent in the first half of this year, boosted by a 9.2 percent rise in industrial production and an 8.2 percent rise in agricultural output, 4.0 percentage points below the same period last year due to the negative impact of the pandemic, which mainly hit services, construction and retail trade, NBT said.
It added monetary stimulus worldwide and low inflation will lead to higher demand and a resumption of global growth in coming years.
Inflationary risks in Tajikistan, however, are likely to ease due to a relatively good harvest, lower demand from a decline in remittances, slower exports and slower economic growth, stable inflation in major trading partners, lower interest rates and a relatively stable foreign exchange market due to a decline in imports.
NBT, which is moving toward inflation targeting, began lowering its key interest rate in January 2018 from 16.0 percent but then had to reverse course after a second rate cut and raise the rate in February 2019.
But in May last year it returned to the easing path and continued with another rate cut in November 2019 before it had to reverse course in January this year, shortly after the International Monetary Fund said tighter monetary policy might be needed to mitigate possible second-round effects from a rise in inflation.
NBT is one of only six central banks to have raised rates this year in stark contrast to the 92 banks that have cut rates this year in response to the collapse of economic activity in March from measures worldwide to contain the spread of the COVID-19 pandemic.
In May the IMF's executive board approved a disbursement of US$189.5 million to help Tajikistan meet urgent balance of payment and fiscal financing needs and help prevent severe economic and human disruption from the pandemic.
The IMF forecast a 2.0 percent contraction in Tajikistan's economy while the budget deficit could rise to 7.7 percent of gross domestic product.
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