Uzbekistan: Central Bank leaves policy rate unchanged, keeps open prospects for rate cuts into year-end

CAUCASUS / CENTRAL ASIA - In Brief 27 Jul 2023 by Ivan Tchakarov

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The Central Bank of Uzbekistan kept the policy rate unchanged at 14.0 percent 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 continue falling by the end of 2023, we see more room to cut the policy rate further to around 12.0 percent by Dec 2023. The accompanying statement aimed to strike a balance between the continuous decline in inflation and still existing risks to price growth. On the one hand, monetary authorities recognized the positive developments with headline inflation, which dropped to 9.0 percent YoY in June, the lowest level in the last 6 years (Graph 1). Headline 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 food price growth and seasonal factors have contributed to declining inflation. The downward movement of inflation expectations has also been welcomed, although at their level they remain well above the 5.0 percent CPI target (Graph 2). On the other hand, the central bank underscored the lower-than-anticipated decrease in services prices, which it interpreted as a sign that underlying demand pressure are still strong. In that sense, policy makers alluded to the expectations that 2023 GDP growth will come in strong at 5.0-6.0 percent (5.0 percent in 2022), which is broadly consistent with our...