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Kyrgyzstan raises rate 3rd time and may hike further

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      The central bank of Kyrgyzstan raised its policy rate for the third time this year, pointing to the improving global economy and higher-than-expected domestic inflation, and said it did not rule out further rate hikes.
     The National Bank of the Kyrgyz Republic (NBKR) raised its discount rate by 100 basis points to 7.50 percent and has now raised it by 250 points this year following earlier hikes in April and February.
     The central bank of the Central Asian republic shifted into a monetary easing cycle in March 2016, cutting its rate 7 times, but switched tack in February 2020, just as the COVID-19 pandemic was beginning to sweep through the world, and began raising its rate in response to rising food prices.
     During last year, when 93 central banks slashed rates to support their economies during the pandemic, Kyrgyzstan kept its rate steady but with inflation continuing to rise the bank has not only raised rates this year but also taken other measures to tighten policy, including reducing liquidity in the banking system.
     The National Bank’s third rate hike this year was decided by its board on July 26 but the statement was first issued on July 27 when the rate hike takes effect.
     ”The rise in consumer prices in the Kyrgyz Republic is growing above expectations, mainly due to the global rise in food prices,” NBKR said.
      It said there was “an ambiguous” situation in global commodity markets, with unfavorable weather in food-producing countries. This is limiting the supply of certain foods and boosting prices, creating inflationary risks.
     Inflation in the Kyrgyz Republic accelerated to 14.2 percent in June – the highest since August 2011  - and rose further to 15.0 percent as of July 16, the bank said. This is well in excess of NBKR’s target of 5.0-7.0 percent.
     The global economy is also recovering from the pandemic, supported by fiscal stimulus and the rollout of vaccines that is leading to an easing of quarantine restrictions though there is still uncertainty as to the pace of growth due to new strains of COVID-19.
     Kyrgyzstan’s economy was hit hard by the pandemic, with gross domestic product shrinking 8.6 percent due to a fall in exports, gold mining, tourism, industry, transport and construction.
     But the outlook this year is improving as tourism gradually returns and gold production rises and last month the International Monetary Fund forecast 3.8 percent growth this year and 6.4 percent in 2022.
     NBKR said Kyrgyzstan’s economy expanded 3.7 percent in the first half of this year, excluding the Kumtor gold mine, but domestic consumption still remains relatively weak and mainly supported by remittances from abroad, which rose 45.3 percent in the first five months to US$778.1 million.
     The IMF said inflation will remain elevated in coming months but slowly return to the bank’s target range, averaging 9.4 percent this year and 6.2 percent next year.
     The IMF on June 8 welcomed the central bank’s rate hikes and said further monetary tightening would be warranted if second round inflation pressures emerged.
     There were no significant changes to monetary conditions, the bank said, adding the banking system was continuing to build up excess liquidity and it was continuing to withdraw this excess to limit inflationary pressures.
    The domestic foreign exchange market was also relatively stable, with international reserves of US$2.7 billion as of July 24, which covers about six months of imports.


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