Uzbekistan: Central bank holds policy rate steady, but sends a dovish signal

CAUCASUS / CENTRAL ASIA - In Brief 15 Jun 2023 by Ivan Tchakarov

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The Central Bank of Uzbekistan (CBU) kept the policy rate unchanged on Jun 15th, but signaled a cut is likely at the next policy meeting. The CBU kept the policy rate unchanged at 14.0 percent, but modified its message to signal a good probability that it may ease monetary policy at its next policy meeting on Jul 27th. Policy rates have already been reduced and there will be more room for the central bank to cut further this year. After raising the refinancing rate by 300bpts to 17.0 percent in Mar’2022 due to elevated geopolitical risks and higher inflation, the central bank eased monetary policy twice in 2022 by 100bpts to 15.0 percent, and further to 14.0 percent in Mar’2023. With inflation forecast to moderate by the end of 2023, we see more room to cut the policy rate further to around 12.0 percent by Dec'2023. Indeed the accompanying statement has now shifted to a more dovish stance. Most importantly, the central bank argued that the downward-sloping trajectory of inflation and inflation expectations could create room for lower policy rates while still keeping the stance of monetary policy moderately tight. This is, in our view, an appreciable change from the previous statement, which maintained a much more balanced assessment of underlying inflation risks. In particular, the May 4th statement only referred to the CBU continuing to carefully monitor price pressures without pointing to the probability of rate cuts. Inflation has been gradually losing steam, facilitating the expected easing of monetary policy. Inflation had been inching up over the course of 2022, hitting 12.3 percent YoY in Dec’2022 (9.8 percent in Jan’ 2022). However, favorable base, moderating f...