National Bank of Tajikistan has revisedmonetary policy stance

On 20 March 2017, the Monetary Policy Committee of the National Bank of Tajikistan (MPC hereafter) held a scheduled meeting, where the recent developments of external economy and macroeconomic indicators,inflation trends, forecast and risks in order to ensureeffectivenessof monetary policy and price stability were discussed.

In January - February, 2017 (as compared to December, 2016)inflation rate reached to 1.7%, which is 0.2 percentage points less than the same period of previous year. The observed tendency of inflation mainly in February (1.1%) caused by the seasonal factors, and increase in prices of some imported goods and services.

The official exchange rate of Somoni against US dollar from the beginning of 2017 untill February 28 depreciated by 1.4% (in same period of 2016 the depreciation was 10,7%).

In January-February, 2017 money supply reflected upward trend,where the volume of reserve money as of end February made TJS 11.1 billion and cash in circulation TJS 8.4 billion having increased in comparison with the same period of previous year by 54.5% and 59.9%,respectively.

Notwithstanding therelatively stable inflation rate, risks arising from both internal and external factors in economy, can have an impact on financial stability and domestic prices level.

According to the World Bank data in the beginning of current year the world food prices hason average increased by 10.1% and oil pricesreached USD 55.0 which can have a negative impact on inflation rate.

It is necessary to note that pressures are on upward side due to ongoing external and internal economic uncertainties and Somoni depreciation during March 2017. The FX and monetary factors may have a negative impact on price stability, due to a significant share of imported goods in the consumer's basket (more than 60%). Currently, a second round effect of such factors as money supplygrowth and high demand on foreign currency due to large construction projects, speculative operations supports depreciation trends.

At the same time, as a result of implementing relatively tight monetary policy of the Federal Reserve System, i.e. increasing the interest rate to 0.25 p.p. (as of 16 March 2017) may arise exchange rate fluctuations and probability of further increasing the interest rates can exert pressure on the national currency and hike(spike) in consumer prices during a current year.

Furthermore, within the decision of supporting the banking system implementation of the mechanism of recapitalizinginsolvent banks led to a significant growth of monetary base, causing exchange rate and inflationary risks in the economy. Since the part of the given funds are being converted intoforeign currency,it may worsen demand and supply imbalance and increase negative inflationary expectations on macroeconomic indicators.

In this regard, to minimize potential inflationary risks, prevention of excessive depreciation of national currency, reducing dollarization in the economy and preserve the stability of main macroeconomic indicators, the MPC has taken the following decisions:

- increase the refinancing rate by 3.5 percentage points to 16.0%;
- increase the reserve requirements ratio in national currency by 1.5 percentage points and in foreign currency by 2.0 percentage points to3.0% and 9.0% respectively;
- set the minimum interest rate of credit auctions at refinancing rate level;
- set interest rate on overnight loans at the level of refinancing rate plus 2.0 percentage points;
- to decrease the negative impact of the volume of cash in circulation to issue of six-months term securities on refinancing rate plus 2.0 percentage points level.

At the same time, according to the decision, in order to undertake monitoring and analysis of the real interbank market situation, to determine the supply and demand of the national currency, volume and structure of the operations held by credit institutions in the interbank market, it is necessary to implement calculation of the weighted average indicative interbank interest rate («Benchmark Rate») on a daily basis.

The given measures undertaken for minimizing a tendency of increasing risks will promote preservation of a stable inflation rate in economy within the projected indicators at 7.0 percent YoY, restrict an influence of negative monetary factors on purchasing power of national currency, ensuring a balance between supply and demand in the foreign exchange market as well as liquidity management and decrease of dollarization.

The next meeting of the MPC of Tajikistan will be held in the second half of May, 2017 and the decision on change of monetary conditions will be announced through the official website of the National Bank of Tajikistan.

Monetary Policy, Research and Development Department