Central bank’s policy rate was raised by 1 percentage point, reaching 11 percent effective from May 12. On May 10, the Board of Directors of the Bank of Mongolia made this decision in order to tighten the monetary policy. By doing so, Bank of Mongolia’s loan rates to commercial banks will be increased by 1 percent.

Previously, the Bank of Mongolia (BoM) raised its policy rate to 14 percent with the purpose to satisfy stability of the money market. Along with the banking system’s stability, the BoM cut the rate three times since May of 2009 down to 10 percent. “BoM had a plan to hold a lenient monetary policy throughout the year 2010; however, a situation that recently arisen makes it hopeless for BoM to work within the plan,” said B. Lkhagvajav, BoM’s Public Relations Department head.

BoM explained that inflation grew in first four months of 2010 and it is commonly connected with factors of supply; however, current distribution of cash and promise to raise salaries caused inflation to speed up and lead to exaggerate expectations of inflation. Therefore, BoM takes this action with a purpose to satisfy mid-term price stability and reduce inflation expectations.

As of April of 2010, inflation rate in Ulaanbaatar increased by 11.4 percent compared to January, 2010 and by 8.4 percent annually. Price growth is quickened compared with the same period of the previous year and exceeded 8 percent predicted in the basic guideline of State Monetary Policy according to annual indicator and even from the beginning of 2010. The present fast growth of prices directly connects with the shortfall of meat supply and price-ups of meat due to the loss of 7.5 million head of livestock during the past harsh winter. Since the beginning of 2010, prices of meat and meat products increased by 64.2 percent. Along with it, stateregulated service tariffs including electricity, heating, water and landline telephone tariffs increased by 10-37.5 percent as compared with same period of previous year.

The price growth is generally described by factors of supply; however inflation in February and April were observed to have had more growth in connection with a state decision to issue Tgs120,000 to every citizen from the Human Development Fund within this year and start allocation of Tgs70,000. Moreover, it was decided to raise the salary of state workers by 30 percent beginning October 1 as a result of trilateral talks of the Mongolian Association of Employers, Confederation of Mongolian Trade Unions and the Government. The salary increase of state workers often leads to an increase in the salary of private sector employees. It is believed coincidence of this process with the distribution of money (Tgs120,000) is likely to speed up inflation and exaggerate inflation expectations.

There is a prediction that inflation is likely to be at a very high rate at the end of this year due to the increase of salaries and distribution of money. For this reason, the BoM underlined this action to raise its policy rate in order to prevent price stability from becoming unbalanced and banking sector difficulty. Central bank is very vigilant about recurrence of previous practices when inflation reached 34 percent at the end of 2008 and early 2009, and the rate of USD 1 equaled Tgs1700 and state foreign currency reserve lost 50 percent.

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