Why is this important
The decrease in inflation to 8% and the improvement of the forecast indicate the effectiveness of the Central Bank’s tight monetary policy. The strengthening of the soum contributes to the slowdown of imported inflation. However, high demand for energy and price liberalization create risks of inflationary pressures returning.
What happened
- The Central Bank maintained the key interest rate at 14% per annum;
- The inflation forecast for 2025 has been reduced to 8%;
- Inflation in September was 8% per annum (−0.8% compared to August);
- Core inflation decreased to 7% due to the harsh policy and strengthening of the soum;
- Food and non-food prices slowed to 6.1%;
- GDP growth forecast for the end of the year is 7−7.5%.
Inflation reduction factors
- Central Bank’s tight monetary policy;
- The strengthening of the soum by 6.4% since the beginning of the year, which reduced imported inflation;
- Exhaustion of last year’s inflationary factors;
- Expansion of the share of goods and services whose price growth has slowed down.
Proinflationary risks
- Inflationary expectations of citizens and businesses exceed the current and projected rates of price growth;
- High level of aggregate demand due to growth in real income and retail lending;
- Liberalization of energy prices can cause secondary inflationary pressures;
- Risks associated with the supply of individual goods.
Context
The Central Bank continues to pursue a relatively tight monetary policy despite the slowdown in inflation. The 14% rate ensures the attractiveness of savings in sums, balances lending rates, and restrains aggregate demand. The medium-term inflation target remains at 5% per annum.
The strengthening of the soum by 6.4% since the beginning of the year is a key factor in reducing inflation. A stronger national currency reduces imports and lowers prices for industrial goods. However, this creates problems for exporters whose products become less competitive.
High levels of economic activity (GDP growth forecast 7−7.5%) and real income growth support consumer demand, which can slow down disinflation. The liberalization of energy prices is a risk of inflationary pressure returning, as it will affect the cost of goods and services.
The reduction of core inflation to 7% is a positive signal, showing that disinflation is not only related to seasonal factors but also reflects structural changes in the economy. However, inflation expectations are higher than the current rates, which may prevent further price reduction.
