Central Bank announces its inflation forecast for 2020

 Monetary conditions

 In the second quarter of 2020, relatively moderate tight monetary conditions were maintained. In the interbank money market, a positive spread (difference) of interest rates on time deposits for up to two weeks with the base rate was formed.

 Interest rates on deposits in the national currency were relatively stable and showed growing dynamics. At the end of June, the average weighted interest rates on time deposits of individuals amounted to 20%, and on-time deposits of legal entities – 17%.

 The decrease in interest rates on loans in national currency from 25.8% at the beginning of the year to 23.7% in June is explained by the transfer of additional liquidity to commercial banks during the pandemic to purchase housing and lending to businesses under government programs.

 The dynamics of the national currency exchange rate were formed under the influence of the deterioration of the general situation in the world economy, the decline in foreign exchange earnings and the devaluation of the national currencies of major trading partners. As a result, in April this year, the exchange rate depreciated by 5.8%. In May-June, the exchange rate was relatively stable, with a devaluation rate of 0.4%.

 Inflation forecast

 Given the current situation in the economy and the level of uncertainty associated with the pandemic, the CB kept the inflation forecast for 2020 unchanged at 11-12.5% per annum.

 As long as the demand for basic foodstuffs and medicines remains high in the context of long-term maintenance of quarantine measures, the demand for non-primary products will decrease as a result of redistribution and optimization of expenditures of the population.

 In addition, as a result of further extension of quarantine restrictions, restrictions on the movement of labor resources, the deterioration of the logistics system, and the increase in the time and cost of transporting goods may have an increasing effect on the prices of basic goods.

 In January-June this year, lending to the economy increased by 18.2% (38 trillion soums), money supply – by 12.3% (11.2 trillion soums), these were the factors driving up core inflation significantly higher than the budget revenues in the second quarter. Overall, core inflation is expected to be around 12% by the end of the year.

 With the intensification of anti-pandemic measures and the increase in healthcare costs, the pressure on the budget and centralized funds will continue in the second half of the year, which will lead to a significant increase in the overall fiscal deficit above the forecast.

 According to preliminary estimates, as a result of the recovery of economic activity and measures taken to support key sectors of the economy, positive GDP growth is expected in the second half of the year and real growth will reach 1.5-2.0% by the end of the year.

 Risks and uncertainties

 One of the main risks in the coming periods is the rapid change in the economic situation as a result of the impact of the pandemic and the measures taken to prevent it.

 This leads to high levels of uncertainty in the economy, making it difficult to predict economic processes in advance, and consequently significantly reducing the accuracy and efficiency of forecasts.

 At the same time, the pressure on inflation remains due to monetary factors, in particular, the sharp increase in lending to the economy. This, in turn, requires measures to balance credit growth rates and increase the return on previously allocated loans.

 In addition, the long-term recovery of economic activity in our major trading partners and the maintenance of an unfavorable price environment in world markets may lead to a certain reduction in foreign exchange earnings from exports and cross-border remittances.

 The Central Bank will continue to study the nature of the factors and risks of inflation under the influence of external and internal conditions and will make appropriate decisions on the base rate based on the formation of inflation forecast dynamics.