Central bank cuts policy interest rates for the second time
The Governor of the Central Bank of Mongolia, N. Zoljargal, announced on Friday that the Central Bank is cutting its policy interest rates for the second time this year with the aim of strengthening the economy.
Effective April 8, the Central Bank will reduce its policy rate from 12.5 percent to 11.5 percent. According to the bank, the reduction is expected to increase domestic credit and investments and stimulate business activity.
The bank said that the decision to cut policy rates was made in view of the subsiding inflation rate and the decline in investment last year. The announcement was made following the third meeting of the Central Bank’s Board.
“The state budget inflation rate pressure has decreased along with supply- and demand-related inflation indicators, and the current inflation rate is congruent with our target for this year. This has provided favorable conditions that make it possible to reduce interest rate,” said N.Zoljargal in a statement on Friday.
The bank cut interest rates in January, for the first time since 2009, after economic growth moderated to 12.3 percent last year from a record 17.3 percent in 2011. The slow in growth is believed to have been a result of the decline in the price of coal, Mongolia’s biggest export.
The price of exports from Mongolia is decreasing while import costs are increasing, according to N.Zoljargal.
“The Mongol Bank (Central Bank) cut the rate more than last time in the hope that it will have a faster and more noticeable positive effect on business growth,” said N.Zoljargal.
The Central Bank aims to keep inflation rate within 8 percent this year. The Governor of the Central Bank has said this is achievable and probable, as the government is implementing number of projects and sub-projects to counter inflation.
The Central Bank’s policy interest rate directly affects the interest rates of loans issued by commercial banks.
“Looking forward, there are possibilities to further reduce policy interest rates, but the most worrisome issue holding us back is declining foreign direct investment and the increasing foreign trade deficit,” said N.Zoljargal.
Business groups in Mongolia have been critical of the government decisions to increase legislative control over the “strategic” sector which includes the mining industry. The Business Council of Mongolia, which counts Rio Tinto Group, Peabody Energy and General Electric Co. among its members, issued a letter in January criticizing proposed amendments to mining laws, claiming the changes would deter investment in the sector. Despite this claim, there is still significant interest in Mongolia’s mining sector among investors from countries such as China, Japan, and Germany.
The government has since put the proposed changes to the Mineral Resources Law on hold until after the presidential elections, to prevent the issue becoming politicized.
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