Kyrgyzstan’s central bank increased the key refinancing rate by 150 basis points to 10 percent from 8.5 percent, amid accelerating inflation and geopolitical risks stemming from the Central Asian nation’s close economic ties with Russia.
The bank cited “geopolitical risks”, referring to the Russian invasion of Ukraine. However, high inflation has been a persistent feature of the Kyrgyz economy for most of the past two years.
Russia is one of Kyrgyzstan’s main trade partners and sanctions imposed by the West against Moscow would impact not only Russia, but the economies of its partners.
The som national currency reacted immediately to the Russian rouble’s devaluation – it fell to 100 some to one U.S. dollar, while the official rate was fixed at 89.1 to the dollar.
The central bank tried to play down the broader impact of sanctions aimed at Russia’s financial system.
“Most commercial banks in the Kyrgyz Republic are connected to the SWIFT system either through the National Bank or directly, so [there is no risk of] individual banks being affected because of Russia being disconnected from SWIFT,” the bank said in a statement.
The Central Asian country’s economy bounced back last year and grew by 3.6 percent. The growth was mainly backed by the industrial sector and services as well as by the growing volume of remittances to the country. In January, the economy expanded by 1 percent year-on-year.
Annual inflation in Kyrgyzstan reached 11.2 percent in January this year, the same as in 2021. Monthly inflation was 1 percent in January.
In January, the central bank said that an additional contribution to inflation this year was made by rising prices for fuels and lubricants.
According to the bank, under the current conditions, it decided to maintain the intended movement towards tightening monetary conditions and the decision to raise the rate was made in order to minimize the negative effect of external shocks on the current dynamics of inflation and inflation expectations.
The money market situation is influenced by a significant increase in the overall level of excess liquidity in the banking system, formed against the backdrop of growing uncertainty about the recovery of the global economy and ongoing geopolitical tensions, the central bank said.