Uzbekistan’s central bank has raised its key rate to 17 percent from 14 percent to mitigate the external impact and suppress inflation amid economic and financial uncertainties in Russia, the main trading partner of the Central Asian nation.
The central bank was due to hold a meeting to decide on the rate a week ago, but postponed it “taking into account the risks in the external economic environment and the need for additional analysis to assess changes in the economies of major trading partners and their impact on the economy.”
Russia, which came under western sanctions over its invasion of Ukraine, is Uzbekistan’s key trading partner. Russia’s financial markets have been thrown into turmoil. Fitch, Moody’s, S&P downgraded Russia’s sovereign rating to junk, FTSE Russell and MSCI decided to remove Russian equities from all their indexes and many western companies left the Russian market or suspended operations there.
The central bank’s decision was in response to “high uncertainties and tensions in the external economic environment … (to) ensure macroeconomic and financial stability by preventing the growth of devaluation and inflation expectations, as well as to maintain savings in the national currency and mitigating the impact of external risks on Uzbek economy.”
According to the bank, the economic situation in Uzbekistan’s major trading partners, sharp fluctuations of their exchange rates, rising commodity and energy prices are increasing macroeconomic uncertainties and risks. Surveys conducted among the population and business entities show that there is a significant increase in their devaluation expectations, the bank said.
The bank said that it would take all necessary measures to prevent a sharp rise in domestic prices, ensure the continuity of the payment system and financial stability in the country.
Short-term effects are reflected in the reduction of supply in the domestic foreign exchange market due to reduced export earnings and remittances to the country, changes in domestic prices because of high prices for imported consumer goods, while medium-term effects put pressure on economic growth through reduced external and domestic demand.
The bank said the implementation of the government measures for 2022-2023 on macroeconomic and structural reforms would help to mitigate these negative effects.
At the same time, the forecast of macroeconomic development is being revised by the bank taking into account the external economic situation. “Herewith, with the decline in inflation and devaluation expectations, lowering external pressures on internal macroeconomic conditions, the policy rate will be gradually decreased,” the bank said.
Uzbekistan’s central bank has adjusted the dynamics of the national currency in response to external risks and devaluation pressures, and since the beginning of this year, the Uzbek sum has depreciated by 6.8 percent against the U.S. dollar.
In order to prevent sharp fluctuations in the exchange rate and ensure the stable operation of the market the central bank increased the volume of interventions in the domestic foreign exchange market in the first half of March in accordance with the “principles of neutrality.”
These interventions are being carried out at the expense of accumulated reserves created last year as a result of favourable conditions on the foreign exchange market.
The bank will continue its appropriate interventions in the future in order to ensure stability on the market and measures will be taken to prevent sharp fluctuations in the national currency, the bank said adding that raising the key rate was also aimed at mitigating existing short-term adverse effects and shocks.
The bank said that measures to minimise external risks included providing short-term liquidity to commercial banks without any restrictions (through REPO and SWAP operations), increasing limits on the average monthly balance of short-term bonds issued by the central bank to 20 trillion sums.
In addition, commercial banks are permitted to use the exchange rate formed as a result of a call auction on the currency exchange when setting exchange rates for retail transactions until July 1. Interest rates on the central bank notes purchased by commercial banks at auctions have been raised to the upper bound of the interest rate corridor, while limits on two-week deposit auctions have been eliminated.