Curbing Inflation: Uzbekistan's Approach
nflation in Uzbekistan was historically relatively high, and in recent years there has been a further acceleration of inflation in effect of structural reforms in the economy, liberalization of regulated prices, changes in tax policy and rising incomes. This raised the issue of reducing inflation in order to ensure macroeconomic stability.
As a solution to this issue, the Central Bank demanded to improve its monetary policy, in particular, the revision of its directions and principles.
In order to achieve long-term sustainable economic growth and increase the welfare of the population, the Central Bank was tasked to ensure a stable low inflation rate.
First of all, the main goal of the Central Bank was confirmed as to ensure price stability in the economy, and in accordance with the relevant Presidential decree, Central Bank should gradually adjust its monetary policy to the inflation targeting regime based on international experience.
Transition of monetary policy to inflation targeting has been on the agenda since 2017, and the first steps of the Central Bank were to implement structural changes in the direction of monetary policy and improve staff capacity.
One of the peculiarities of the inflation targeting regime is a decision-making process based on an enhanced macroeconomic analysis and forecasts, and the forecasting skills of Central bank’s staff was developed with the assistance of the European Bank for Reconstruction and Development and the Swiss National Bank.
In particular, the Quarterly Forecast Model (QPM) is used in the implementation of medium-term macroeconomic forecasts, and models such as ARIMA, BVAR and FAVAR are used in the short-term forecasting of inflation. The forecasts obtained from the results of the model are effectively used in making decisions on monetary policy guidelines and, in particular, on the policy rate.
Also, due to the importance of the role of communication policy in the inflation targeting regime, the need for the Central Bank to ensure transparency in its activities, including monetary policy decisions, relevant departments have been established.
From 2020, the practice of reviewing the policy rate of the Central Bank 8 times a year has been introduced, a press-release is issued on the results of each board meeting, and a press conference is held with the participation of the Chairman of the Central Bank. The Monetary Policy Review, which is published quarterly, is also one of the main means of communication with public.
According to the Presidential Decree of November 2019, the Central Bank will gradually harmonize monetary policy mechanisms with the standards of the inflation targeting regime from 2020, ensuring that the intermediate target for inflation will not exceed 10% in 2021 and 5% from 2023 as a permanent target.
The constant inflation target of 5% was determined on the basis of comprehensive analysis, forecasts of the macroeconomic situation in the country, the inflation rate in our major trading partners, the experience of developing countries in setting inflation targets.
At the same time, the Central Bank will take measures together with the Government to reduce inflation and ensure its stable low level. Inflation factors are divided into monetary and non-monetary factors, and the Central Bank minimizes the impact of monetary factors on inflation through the active use of monetary policy instruments.
However, since monetary policy has no effect on non-monetary factors, it is important that other ministries and agencies within their competence eliminate inflationary factors, thereby ensuring a single common goal - macroeconomic stability in the country.
Today, the Central Bank is constantly monitoring changes in prices in the economy, conducting an in-depth study of a group of goods and services with relatively higher price hike, and submits proposals to the Government to address the negative impact of these factors on inflation. The availability of government support and political will to reduce inflation and ensure price stability in the economy will certainly serve to increase the effectiveness of the reforms.
Achieving the inflation target requires not only tightening monetary policy, but also effective fiscal policy and structural reforms.
In this regard, a plan of measures to be implemented in the field of fiscal policy has been developed, which includes the gradual reduction of the budget deficit and fiscal consolidation, the application of a limited approach to borrowing, introduction of a mechanism for legislating the annual parameters of the use of state budget funds, extra-budgetary funds, including Fund for Reconstruction and Development, effective control over budgetary execution.
In turn, government plans to implement structural reforms such as regulatory price liberalization, creation of modern production and transport infrastructure, uninterrupted supply of energy throughout the country, improving the competitive environment and creating equal business opportunities, growth of private investment and financial market development and increasing efficiency of production factors.
From the beginning of 2020, the Central Bank entered an active phase of transition to the inflation targeting regime, initially introducing the Central Bank's policy rate and interest rate corridor. This is due to the fact that in the inflation targeting regime, the main transmission channel for the transfer of monetary policy decisions to the economy is the interest rate channel.
Central bank notes have also been issued to effectively regulate the liquidity surplus in the banking system, to replace non-profit highly liquid assets of banks with alternative income-generating instruments and thereby reduce the price pressure on other active operations (especially loans).
Starting from February 2020, short-term monetary operations were introduced in order to effectively regulate the interbank money market interest rates and ensure that they are formed within the interest rate corridor close to the Central Bank policy rate.
In the second half of March 2020, against the background of the spread of the pandemic and the introduction of quarantine measures in Uzbekistan, there was a need to make some changes in monetary policy.
First of all, taking into account the high weight of the factors that reduce the dynamics of inflation in the conditions of a decrease in economic activity, the Central bank reduced the policy rate of the central bank twice: in April and September from 1 percent point (from 16 percent to 14 percent), due to the tasks of supporting economic activity.
At the same time, the Central Bank will take measures together with the Government to reduce inflation and ensure its stable low level. Inflation factors are divided into monetary and non-monetary factors, and the Central Bank minimizes the impact of monetary factors on inflation through the active use of monetary policy instruments.
However, since monetary policy has no effect on non-monetary factors, it is important that other ministries and agencies within their competence eliminate inflationary factors, thereby ensuring a single common goal - macroeconomic stability in the country.
Today, the Central Bank is constantly monitoring changes in prices in the economy, conducting an in-depth study of a group of goods and services with relatively higher price hike, and submits proposals to the Government to address the negative impact of these factors on inflation. The availability of government support and political will to reduce inflation and ensure price stability in the economy will certainly serve to increase the effectiveness of the reforms.
Achieving the inflation target requires not only tightening monetary policy, but also effective fiscal policy and structural reforms.
In this regard, a plan of measures to be implemented in the field of fiscal policy has been developed, which includes the gradual reduction of the budget deficit and fiscal consolidation, the application of a limited approach to borrowing, introduction of a mechanism for legislating the annual parameters of the use of state budget funds, extra-budgetary funds, including Fund for Reconstruction and Development, effective control over budgetary execution.
In turn, government plans to implement structural reforms such as regulatory price liberalization, creation of modern production and transport infrastructure, uninterrupted supply of energy throughout the country, improving the competitive environment and creating equal business opportunities, growth of private investment and financial market development and increasing efficiency of production factors.
From the beginning of 2020, the Central Bank entered an active phase of transition to the inflation targeting regime, initially introducing the Central Bank's policy rate and interest rate corridor. This is due to the fact that in the inflation targeting regime, the main transmission channel for the transfer of monetary policy decisions to the economy is the interest rate channel.
Starting from February 2020, short-term monetary operations were introduced in order to effectively regulate the interbank money market interest rates and ensure that they are formed within the interest rate corridor close to the Central Bank policy rate.
In the second half of March 2020, against the background of the spread of the pandemic and the introduction of quarantine measures in Uzbekistan, there was a need to make some changes in monetary policy.
First of all, taking into account the high weight of the factors that reduce the dynamics of inflation in the conditions of a decrease in economic activity, the Central bank reduced the policy rate of the central bank twice: in April and September from 1 percent point (from 16 percent to 14 percent), due to the tasks of supporting economic activity.
As a solution to this issue, the Central Bank demanded to improve its monetary policy, in particular, the revision of its directions and principles.
In order to achieve long-term sustainable economic growth and increase the welfare of the population, the Central Bank was tasked to ensure a stable low inflation rate.
First of all, the main goal of the Central Bank was confirmed as to ensure price stability in the economy, and in accordance with the relevant Presidential decree, Central Bank should gradually adjust its monetary policy to the inflation targeting regime based on international experience.
Transition of monetary policy to inflation targeting has been on the agenda since 2017, and the first steps of the Central Bank were to implement structural changes in the direction of monetary policy and improve staff capacity.
One of the peculiarities of the inflation targeting regime is a decision-making process based on an enhanced macroeconomic analysis and forecasts, and the forecasting skills of Central bank’s staff was developed with the assistance of the European Bank for Reconstruction and Development and the Swiss National Bank.
In particular, the Quarterly Forecast Model (QPM) is used in the implementation of medium-term macroeconomic forecasts, and models such as ARIMA, BVAR and FAVAR are used in the short-term forecasting of inflation. The forecasts obtained from the results of the model are effectively used in making decisions on monetary policy guidelines and, in particular, on the policy rate.
Also, due to the importance of the role of communication policy in the inflation targeting regime, the need for the Central Bank to ensure transparency in its activities, including monetary policy decisions, relevant departments have been established.
From 2020, the practice of reviewing the policy rate of the Central Bank 8 times a year has been introduced, a press-release is issued on the results of each board meeting, and a press conference is held with the participation of the Chairman of the Central Bank. The Monetary Policy Review, which is published quarterly, is also one of the main means of communication with public.
According to the Presidential Decree of November 2019, the Central Bank will gradually harmonize monetary policy mechanisms with the standards of the inflation targeting regime from 2020, ensuring that the intermediate target for inflation will not exceed 10% in 2021 and 5% from 2023 as a permanent target.
The constant inflation target of 5% was determined on the basis of comprehensive analysis, forecasts of the macroeconomic situation in the country, the inflation rate in our major trading partners, the experience of developing countries in setting inflation targets.
At the same time, the Central Bank will take measures together with the Government to reduce inflation and ensure its stable low level. Inflation factors are divided into monetary and non-monetary factors, and the Central Bank minimizes the impact of monetary factors on inflation through the active use of monetary policy instruments.
However, since monetary policy has no effect on non-monetary factors, it is important that other ministries and agencies within their competence eliminate inflationary factors, thereby ensuring a single common goal - macroeconomic stability in the country.
Today, the Central Bank is constantly monitoring changes in prices in the economy, conducting an in-depth study of a group of goods and services with relatively higher price hike, and submits proposals to the Government to address the negative impact of these factors on inflation. The availability of government support and political will to reduce inflation and ensure price stability in the economy will certainly serve to increase the effectiveness of the reforms.
Achieving the inflation target requires not only tightening monetary policy, but also effective fiscal policy and structural reforms.
In this regard, a plan of measures to be implemented in the field of fiscal policy has been developed, which includes the gradual reduction of the budget deficit and fiscal consolidation, the application of a limited approach to borrowing, introduction of a mechanism for legislating the annual parameters of the use of state budget funds, extra-budgetary funds, including Fund for Reconstruction and Development, effective control over budgetary execution.
In turn, government plans to implement structural reforms such as regulatory price liberalization, creation of modern production and transport infrastructure, uninterrupted supply of energy throughout the country, improving the competitive environment and creating equal business opportunities, growth of private investment and financial market development and increasing efficiency of production factors.
From the beginning of 2020, the Central Bank entered an active phase of transition to the inflation targeting regime, initially introducing the Central Bank's policy rate and interest rate corridor. This is due to the fact that in the inflation targeting regime, the main transmission channel for the transfer of monetary policy decisions to the economy is the interest rate channel.
Central bank notes have also been issued to effectively regulate the liquidity surplus in the banking system, to replace non-profit highly liquid assets of banks with alternative income-generating instruments and thereby reduce the price pressure on other active operations (especially loans).
Starting from February 2020, short-term monetary operations were introduced in order to effectively regulate the interbank money market interest rates and ensure that they are formed within the interest rate corridor close to the Central Bank policy rate.
In the second half of March 2020, against the background of the spread of the pandemic and the introduction of quarantine measures in Uzbekistan, there was a need to make some changes in monetary policy.
First of all, taking into account the high weight of the factors that reduce the dynamics of inflation in the conditions of a decrease in economic activity, the Central bank reduced the policy rate of the central bank twice: in April and September from 1 percent point (from 16 percent to 14 percent), due to the tasks of supporting economic activity.
At the same time, the Central Bank will take measures together with the Government to reduce inflation and ensure its stable low level. Inflation factors are divided into monetary and non-monetary factors, and the Central Bank minimizes the impact of monetary factors on inflation through the active use of monetary policy instruments.
However, since monetary policy has no effect on non-monetary factors, it is important that other ministries and agencies within their competence eliminate inflationary factors, thereby ensuring a single common goal - macroeconomic stability in the country.
Today, the Central Bank is constantly monitoring changes in prices in the economy, conducting an in-depth study of a group of goods and services with relatively higher price hike, and submits proposals to the Government to address the negative impact of these factors on inflation. The availability of government support and political will to reduce inflation and ensure price stability in the economy will certainly serve to increase the effectiveness of the reforms.
Achieving the inflation target requires not only tightening monetary policy, but also effective fiscal policy and structural reforms.
In this regard, a plan of measures to be implemented in the field of fiscal policy has been developed, which includes the gradual reduction of the budget deficit and fiscal consolidation, the application of a limited approach to borrowing, introduction of a mechanism for legislating the annual parameters of the use of state budget funds, extra-budgetary funds, including Fund for Reconstruction and Development, effective control over budgetary execution.
In turn, government plans to implement structural reforms such as regulatory price liberalization, creation of modern production and transport infrastructure, uninterrupted supply of energy throughout the country, improving the competitive environment and creating equal business opportunities, growth of private investment and financial market development and increasing efficiency of production factors.
From the beginning of 2020, the Central Bank entered an active phase of transition to the inflation targeting regime, initially introducing the Central Bank's policy rate and interest rate corridor. This is due to the fact that in the inflation targeting regime, the main transmission channel for the transfer of monetary policy decisions to the economy is the interest rate channel.
Starting from February 2020, short-term monetary operations were introduced in order to effectively regulate the interbank money market interest rates and ensure that they are formed within the interest rate corridor close to the Central Bank policy rate.
In the second half of March 2020, against the background of the spread of the pandemic and the introduction of quarantine measures in Uzbekistan, there was a need to make some changes in monetary policy.
First of all, taking into account the high weight of the factors that reduce the dynamics of inflation in the conditions of a decrease in economic activity, the Central bank reduced the policy rate of the central bank twice: in April and September from 1 percent point (from 16 percent to 14 percent), due to the tasks of supporting economic activity.