Explanatory Note to the Draft of State Monetary Policy Guidelines for 2027

In order to fulfil the primary objective assigned by the Law on the Central Bank (Bank of Mongolia) with greater accountability and consistency, and to raise its institutional capacity to a new level, the Bank of Mongolia has developed, approved and commenced implementation of the “Medium-Term Strategy of the Bank of Mongolia (2026–2030)”. Bank of Mongolia has defined its medium-term vision as “To be an independent, accountable and credible central bank” and is working to achieve the mission of “To protect households' real income through the development of innovation-driven infrastructure and the consistent implementation of independent policies.”

This Medium-Term Strategy rests on the following three fundamental objectives:

• Consistently maintaining price stability: reducing inflation and keeping it stable at around 5 percent over the medium term.
• Ensuring financial stability: enhancing the resilience of the banking sector, transitioning to a big data-based supervisory framework, and strengthening macroprudential policy and the green finance ecosystem.
• Intensifying central bank governance and digital transformation: improving the autonomy and independence of the Bank of Mongolia, resolving its capital deficit, and establishing sound governance, information security and big data management.

The “State Monetary Policy Guidelines for 2027” is the policy document for the first year of implementation of the Bank of Mongolia’s Medium-Term Strategy for 2026–2030. Accordingly, each objective and measure for 2027 has been formulated in alignment with the relevant strategic objective, past policy lessons, the challenges to be addressed, the responsible institutions and measurable outcomes. Within the mandate conferred by the Law on the Central Bank (Bank of Mongolia), the guidelines aim to support sustainable economic growth and protect households’ real income by ensuring price and financial stability, while simultaneously strengthening the foundations of central bank governance, monetary policy effectiveness, financial sector stability and technological modernization

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Strategic Objective 1: Consistently maintain price stability.

Monetary policy will be implemented with the aim of reducing inflation and maintaining it at a stable level over the medium term. By optimally combining the policy rate, the reserve requirement ratio, and other instruments in response to macroeconomic conditions, the Bank of Mongolia will seek to bring inflation to its target and stabilize it at around 5 percent over the medium term.

Strategic Objective 2: Ensure financial stability.

Policies and regulations aimed at improving the resilience of the banking sector to international standards will be implemented to strengthen financial stability. In this context, a phased transition to a risk-based banking supervision framework will be conducted, governance will be improved by reducing the concentration of shareholding, and the competitiveness of the sector will be enhanced by supporting the participation of foreign banks. Furthermore, the stability of the financial system will be maintained by strengthening the institutional framework for macroprudential policy and by establishing frameworks for green finance and financial consumer protection.

Strategic Objective 3: Intensify governance and digital transformation.

The governance and operational capacity of the Bank of Mongolia will be strengthened by improving its autonomy and independence, resolving the Bank of Mongolia’s capital deficit, bringing its governance and human resource systems up to international standards, enhancing public communication and external cooperation, and increasing the accountability and transparency of the central bank.

Expected outcomes of the strategy: With the implementation of the Medium-Term Strategy put forward by the Bank of Mongolia, inflation will stabilize at around 5 percent, the central bank’s capital deficit will be resolved, governance will improve, the management of international reserves will become more efficient, the share of non-performing loans will decline, the prudential ratios of the banking sector will improve, and buffers will be built to withstand adverse effects stemming from developments in the external economy. It will also be significant in that integrated money and capital market infrastructure will be developed, enhancing the capacity of the financial sector to perform its financial intermediation role in support of the real economy efficiently.

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The Bank of Mongolia will develop and approve an action plan for the implementation of the Medium-Term Strategy, regularly assess its implementation internally and make the necessary amendments and improvements, while operating subject to external oversight.

Risk-based strategy updates: During the implementation period of this strategy, should any of the following exceptional circumstances arise as a result of unexpected changes or shocks in the external and domestic environment, the strategy shall be formally recalibrated and the necessary updates introduced:

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Internal and external factors that may constrain the implementation of the strategy: Should any of the following risks that may constrain the independence of the Bank of Mongolia, and the implementation of governance reforms materialize, the corresponding adjustments and amendments shall be made to the strategy:

• Rising international uncertainty and protracted geopolitical conflicts causing disruptions to supply chains;
• Amendments to the Law on the Central Bank (Bank of Mongolia) and other relevant laws being delayed for political reasons, or their underlying concept being altered so that the primary objective remains “ensure stability of the national currency - togrog”;
• The coordination between monetary and fiscal policy not being enshrined in law, the issue of legislating prudent limits on fiscal expenditure remaining unresolved, and work on expanding supply chain financing being slow, consequently resulting in continued growth of current fiscal expenditure and the persistence of procyclical and expansionary fiscal policy;
• The issuance by the Government of special securities to be held by the Bank of Mongolia being delayed beyond the planned period or conducted in a smaller amount;
• Stakeholders other than the Bank of Mongolia failing to make the necessary efforts in the development of the integrated securities registration system.

Interruptions in meeting the inflation target

Data for the past 15 years show that inflation outturns fell within the Bank of Mongolia’s target in only 5 of those years. Inflation volatility has increased particularly since the COVID-19 pandemic, with the average deviation from the midpoint of the target rising from 4 percentage points in 2016–2020 to 4.7 percentage points in 2021–2026. As inflation fluctuations have thus increased and become more persistent, there is now an imperative need to pay particular attention to addressing the root causes of inflation in order to keep inflation stable at a low level over the medium and long term. This is not an issue for the Bank of Mongolia alone; it has become a pressing and complex issue that must be resolved by ensuring structural, systemic and legal coherence involving all stakeholders.

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The root causes of recent high inflation are supply-driven increases in food and fuel prices, together with demand-driven factors such as fiscal expenditure and high-wage growth in public sector. More specifically, in Mongolia, increases in food and fuel prices are mostly triggered by supply disruptions, adverse weather events and unexpected external shocks. Demand-driven inflation (as measured by core inflation), on the other hand, has predominantly tended to rise under the influence of expansionary fiscal policy, wage growth not aligned with productivity growth, and external inflation.

The policy lessons of the past 15 years indicate that there is little scope to address the root causes of inflation without decisive measures. Therefore, to reduce supply-driven inflation, it is critically important that the Government take the necessary measures to strengthen domestic supply chains, their reliability and reserves. Meanwhile, the institutional resilience, good governance and effective operations of the Central Bank, as well as fiscal discipline, play a pivotal role in stabilizing demand-driven inflation. If policy measures appropriate to the causes of inflation are not taken urgently, the economy may again face high inflation in the coming years.

Financial position and the losses of the Bank of Mongolia

Going beyond its primary objective, the Central Bank has, over an extended period, financed mortgage lending, concessional programs to support various sectors and quasi-fiscal price stabilization measures by expanding its balance sheet. At the same time, owing to the underdevelopment of financial derivatives in the domestic market, the Bank of Mongolia has itself borne the losses arising from exchange rate fluctuations. As a result, the accumulated losses of the Bank of Mongolia reached MNT 6.9 trillion and its capital deficit MNT 4.8 trillion as of the end of 2025, narrowing its policy space.

The underlying causes of the accumulated losses, broken down into macroeconomic factors and financial reporting factors, are as follows:

Macroeconomic factors:

• In years marked by strong external shocks and sharp fiscal expansion (2013, 2014, 2016, 2020 and 2024), excess domestic liquidity built up, and the resulting increase in import demand intensified pressure on the exchange rate. Consequently, the Bank of Mongolia incurred unrealized foreign exchange revaluation losses equivalent to 5 percent of GDP in 2016, 2 percent in 2020 and 2 percent in 2022, which had a significant impact on its total losses.
• As the reserves available to hold the exchange rate stable were limited, the Bank of Mongolia entered into a swap agreement with the People’s Bank of China between 2012 and 2016, drawing funds equivalent to USD 1.8 billion, (16 percent of GDP, 2016), and supplying them to the domestic foreign exchange market.
• Another fundamental factor behind the high policy costs has been the policy measures taken to absorb the excess liquidity created in the economy by fiscal dominance, high expenditures comparable to the budget, and numerous quasi-fiscal measures implemented by the Bank of Mongolia. Specifically, the Bank of Mongolia absorbed excess MNT liquidity in the economy by issuing Central Bank Bills (CBBs) in pursuit of exchange rate stability and the inflation target. Since 2018, interest expenses on CBBs have averaged around 1 percent of GDP per year. In addition, to meet the need to accumulate foreign exchange reserves, the Bank of Mongolia purchased gold and foreign currency directly from the domestic market in past years, and the policy cost of re-absorbing the MNT thus injected has been another factor increasing the losses.

In summary, the root causes of the Bank of Mongolia’s accumulated losses are primarily related to fiscal dominance, a fiscal policy that tends to expand regardless of the economic cycle, and financing channeled through state-owned entities. These factors generated excess domestic liquidity in the economy, which the Bank of Mongolia has sterilized using high-cost policy instruments. At the same time, the Bank of Mongolia’s assumption of the costs of quasi-fiscal activities beyond its core mandate created the conditions for losses to accumulate on a large scale. Moreover, its continued intervention in the foreign exchange market to hold the exchange rate stable absorbed exchange rate risk onto the central bank’s balance sheet rather than the market, which became the principal reason for the Bank of Mongolia’s capital deficit.

Financial reporting factors:

The accumulated losses of past years were mainly driven by interest expenses, losses on financial derivatives and foreign exchange revaluation losses. Interest expenses account for 74 percent of the Bank of Mongolia’s accumulated losses; of total interest expenses, interest on CBBs accounts for 56 percent, interest on the swap agreement with the People’s Bank of China and interest paid on funds placed by the Government and banks combining to 43 percent.

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In addition, the Central Bank has entered into long-term swap agreements with banks in order to increase foreign currency inflows, reduce lending rates and the growth of foreign currency loans, and establish a framework for hedging against foreign exchange rate risk. Between 2013 and 2022, the Bank of Mongolia incurred total losses of MNT 2.0 trillion on financial derivative transactions, of which realized losses amounted to MNT 1.6 trillion; MNT 1.1 trillion of these losses relate to 2019–2022. Furthermore, between 2013 and 2025, the Bank of Mongolia incurred total losses of MNT 1.2 trillion on foreign currency exchange, driven by unrealized losses on foreign currency revaluation. The high level of the Bank of Mongolia’s accumulated losses is undermining confidence in the central bank and weakening the effectiveness of monetary policy. Resolving the accumulated losses is a crucial step towards expanding policy space in the future, strengthening independence and creating the conditions for the central bank to perform its core functions on a sustainable basis. Going forward, policy measures to prevent any further deterioration in the central bank’s losses need to be implemented in phases. In this context, the Bank of Mongolia needs to adhere to a strategy of strictly upholding its primary objective of ensuring price stability, reaffirming its position of not engaging in any quasi-fiscal activities, transferring quasi-fiscal measures to the Government, exiting long-term swap agreements in phases, supporting the development of the money market, and developing the financial derivatives market.

Reform of the policies and operations of the Bank of Mongolia

The lessons of the past 10 years show that inflation cannot be stabilized by the policy rate alone. Inflation volatility has been driven by factors beyond the direct control of the Bank of Mongolia, such as fiscal expansion, international and domestic supply disruptions and exchange rate pressures. The State Monetary Policy Guidelines for 2027 have therefore been formulated within the framework of a comprehensive systemic reform that integrates the amendment of the Law on the Central Bank (Bank of Mongolia), governance reform, the delineation between fiscal and monetary policy, and the modernization of information technology.

Demand-driven inflation can be stabilized only through an appropriate mix of fiscal and monetary policy. Fiscal discipline plays a decisive role in macroeconomic balance. Countercyclical fiscal policy prevents excessive expansion or contraction of domestic demand and reduces volatility. Fiscal expenditure has grown by an average of 28.1 percent in the year preceding an election and 27.1 percent in an election year, but by only 3 percent in the following year. As a result, the procyclical expansion of fiscal policy has fueled inflation and narrowed the space for monetary policy, and the resulting “bad mix” of fiscal and monetary policy crowds out the private sector in the short term and weakens economic growth in the long term.

Unless the Bank of Mongolia becomes an independent, autonomous and credible institution that enhances its policy effectiveness and ensures transparency, it will not be possible to increase the impact of policy. To this end, it is first and foremost necessary to amend the Law on the Central Bank (Bank of Mongolia) in the following areas:

• Making the primary objective of the Central Bank clear and unambiguous;
• Establishing a mechanism for determining the fiscal balance and expenditure ceilings consistent with the objective of the Central Bank;
• Eliminating the capital deficit of the Central Bank;
• Improving the governance of the Central Bank.

In order to make the Bank of Mongolia’s policies and operations credible, work began this year to gradually introduce a comprehensive management system based on technological infrastructure, intensify digital transformation and thereby strengthen the governance of the Bank of Mongolia. In this context, developing technology-based infrastructure, improving data governance, making optimal use of big data and artificial intelligence in the Bank of Mongolia’s policy research and analysis, and establishing a management control system with automated early-warning calibration will create the basic conditions for the Bank of Mongolia to make policy decisions promptly and optimally. In addition, the Bank of Mongolia aims to increase productivity of the staff by using technology-based infrastructure and artificial intelligence in its other operations, and to become a lean and accountable institution.

Pursuant to Article 10.2 of the Law on the Central Bank (Bank of Mongolia), policy performance during the reporting year has been submitted to the Standing Committee on Economic Policy of the State Great Khural on a quarterly basis. The key indicators of implementation in 2026 are summarized below:

• Price developments and policy rate changes: Although annual inflation declined to around the target level in the first quarter of 2026, it accelerated to 12.5 percent in August 2026, driven by supply shocks (meat prices and disruptions to fuel supply from the Russian Federation), fiscal expansion and rising inflation expectations. Accordingly, at its August meeting, the Monetary Policy Committee of the Bank of Mongolia tightened policy by raising the policy rate by 0.5 percentage points to 12.5 percent and raising the MNT reserve requirement ratio to 14.5 percent, with the aim of anchoring inflation expectations and stabilizing core inflation.
• Macroprudential policy and the shift in credit structure: As a result of tightening the maximum debt-service-to-income (DSTI) ratio for consumer loans from 70 percent to 45 percent and exempting banks’ long-term foreign funding from reserve requirements, credit supply shifted towards the real economy. Consequently, business loan growth remained robust at around 18.6 percent, while the growth of consumer loans, which stimulate imports, declined to 4.5 percent.
• External balance, official reserves and credit ratings: As a result of the prompt macroprudential measures taken at the beginning of the year to restrict consumer imports, and of policies supporting the attraction of foreign funding by commercial banks (which increased from MNT 5.0 trillion to MNT 16.4 trillion), international reserves reached USD 8.4 billion as of August 2026 and the exchange rate stabilized. Mongolia’s macroeconomic stability and accumulation of external reserves have been positively assessed internationally, and the international rating agencies (S&P, Moody’s and Fitch) have upgraded Mongolia’s sovereign credit rating to BB- / Ba3 / B+.
• Reduced dollarization: With improved confidence in the stability of the currency, MNT deposits in the banking sector grew by 23 percent year on year, while foreign currency deposits contracted by 8 percent, and deposit dollarization and loan dollarization declined to 22.7 percent and 5.9 percent, respectively.