Central Bank maintains key rate at 13.5% as inflation pressure persists

The Central Bank's board decided to maintain the key rate at 13.5 percent per annum at its meeting today, December 12. The Central Bank's press service reported this.

It is reported that in recent months, against the backdrop of high demand and persistent upward pressure on prices in the economy, a slower decline in the inflation rate compared to the forecast has been observed and inflation expectations have been forming higher. At the end of this year, overall inflation is expected to be at the upper limits of the forecast corridor.

"To create a basis for reducing inflationary processes and expectations and the inflation rate to the 5 percent target in the medium term, the monetary and credit conditions have been maintained at the current level," the report says.

It is noted that the annual inflation rate has slightly decreased in the last two months, amounting to 10 percent at the end of November. The decrease in inflation was mainly due to the stabilization of food prices. As the high consumption and investment activity in the economy supports aggregate demand, the risks of an increase in prices for services and non-food goods remain.

"The change in some expenditures within the framework of the primary needs of the population and the emergence of secondary effects of the liberalization of energy prices with the onset of cold weather is also reflected in the inflation expectations of economic entities. In November, the inflation expectations of the population and entrepreneurs accelerated to 13.7 and 12.7 percent, respectively," the report says.

At the same time, the fact that core inflation has been forming at around 7.0 percent for the past four months without significant changes, relatively high levels of core inflation in non-food goods and services, and increasing volumes of receipts in the retail trade and services sector indicate that the influence of demand factors in the economy is maintained.

Also, the stable growth rates of aggregate demand and activity in the labor market indicate that the existing inflationary pressures will persist for a longer period. The increase in wages and cross-border remittances in the economy will increase the incomes of the population in real terms and, in the context of high investment activity, will serve to support aggregate demand in the coming months.

As a result, GDP growth is expected to show stable trends in the second half of 2024, forming around 6-6.5 percent at the end of the year.

Effective containment of inflationary processes in the economy in the context of increasing the real incomes of the population requires ensuring a balance between aggregate demand and supply, which, in turn, requires maintaining the rigidity of monetary conditions at the current level.

In addition, interest rates in the money market and the level of profitability of government securities indicate that monetary conditions are forming at a relatively rigid level. High real interest rates in the banking system increase the population's propensity to save. It is expected that the acceptable growth rate of lending rates and high growth rates of deposits will balance aggregate demand and reduce the impact of monetary factors on inflation.

"Taking into account the above factors and to ensure medium-term price stability, the Central Bank Board decided to leave the key rate unchanged at 13.5 percent per annum.

To achieve a sustainable reduction in inflation to the 5 percent target in the medium term, sufficient monetary and credit conditions will be ensured. In this regard, special attention will be paid to the balance of supply and demand in the economy, inflation expectations, and the pace of structural reforms," ​​the report said.

If there are prospects and grounds for the current high demand and upward pressure on prices in the economy to intensify in the coming quarters, the key rate may be revised upwards. The next meeting of the Central Bank Board to review the key rate is scheduled for January 23, 2025.

Recall that on October 31, the Central Bank left the key rate unchanged at 13.5 percent per annum.