Inflation target

Reducing price volatility of consumer goods and stabilizing inflation within the predetermined target band reduces market uncertainty, supporting households and businesses to make optimal decisions about their consumption, savings, and investment. This provides a crucial foundation for sustainable growth in the medium and long term. Furthermore, low and stable inflation safeguards purchasing power, reduces macroeconomic volatility, and fosters employment, exports, foreign investment, and economic growth.

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In recent years, the frequency and magnitude of supply shocks stemming from the pandemic, trade wars, geopolitical crises, armed conflicts, and climate change have increased significantly. This has resulted in disruptions in supply chains, elevated production costs, and sharp increases in fuel and food prices. Although inflation returned to the target band in the first quarter of the year, it accelerated again due to rising fuel, meat, and vegetable prices. In the second half of this year, increased supplies of meat, vegetables, and grains are expected to ease domestic food inflation. However, the ongoing increases in global oil prices, coupled with high fuel prices and ongoing supply disruptions in Russia, could exert upward pressures on domestic prices. Therefore, the Government and relevant ministries should take proactive measures aimed at reducing the frequency of supply-driven price increases by improving supply-side resilience and establishing technology-based digital infrastructure and systems for registering and monitoring strategic reserves of essential products.

The budget expenditure is expected to increase substantially, reaching MNT 34.0 trillion (deficit: MNT -2.0 trillion) in 2026 under the proposed supplementary budget and MNT 43.6 trillion (37.8% of GDP, deficit: MNT -2.3 trillion) in 2027 under the budget proposal submitted to Parliament. This procyclical fiscal expansion will stimulate domestic demand, posing significant risks to achieving the inflation target, particularly as inflation reached 12.5% in August 2026, driven by supply-side shocks, sharp increases in meat (+49.8%) and fuel (+28.2%) prices.

Fiscal discipline is crucial for achieving macroeconomic and inflation stability. Prudent and countercyclical fiscal policy has a key role in stabilizing inflation and reducing economic volatility by preventing domestic demand from being excessively stimulated or excessively contracted. However, over the past 15 years, budget expenditure increased by an average of 28.1% in pre-parliamentary election years, 27.1% in election years, and only 3% in post-election years. Thus, the procyclical nature of fiscal policy has not only exacerbated inflation and heightened economic volatility, but also has constrained the room for monetary policy, resulting in a “bad policy mix” of fiscal and monetary policy. Such a policy mix crowds out the private sector and undermines the foundations of sustainable economic growth in the long term.

Since monetary policy affects the real economy with a lag, the central bank determines its inflation target over a medium-term horizon rather than a short-term trajectory. Aligning policy to achieve the medium-term inflation target prevents costly policy overreactions to transitory supply shocks. Furthermore, this anchors inflation expectations and supports households and firms in making optimal decisions regarding their future consumption, production, and investment, thereby reducing inflation volatility.

The Bank of Mongolia will consistently implement ‘forward-looking monetary policy’ to stabilize inflation around the 5 percent target over the medium term, as outlined in its Medium-Term Strategy (2026–2030). To achieve this, the Bank of Mongolia plans to take a coordinated set of measures, including improving its forecasting and policy analysis systems, anchoring inflation expectations effectively, optimizing the use of policy instruments in response to macroeconomic conditions, and creating legal frameworks that support establishing value chain financing, preventing procyclical fiscal policy, and creating coordination mechanism between fiscal and monetary policies.

• To support monetary policy decision-making, a risk analysis will be conducted to identify potential shocks and risks that could push up inflation and to evaluate their economic impact. Taking policy measures in response to temporary or seasonal price increases poses a risk of negatively impacting economic growth and mismanaging inflation expectations. Therefore, forward-looking policy decisions will be made based on rigorous research and empirical analysis, considering the magnitude, persistence, and underlying causes of factors driving inflation.
• We will continue to strengthen the monetary policy formulation and decision-making process and improve the quality of our analysis and research. In this regard, the following measures will be implemented:
• Broadening research on examining the relationship among macroeconomic indicators and monetary policy transmission.
• Expanding quantitative and qualitative databases is critical for conducting macroeconomic analysis and forecasting, as well as for identifying potential risks.
• Improving and developing analytical models for macroeconomic forecasting and simulation.
• To ensure an “optimal and prudent policy mix” between fiscal and monetary policies, it is necessary to establish a legal framework to prevent procyclical fiscal policy and strengthen policy coordination. In line with the revision of the Law on the Central Bank (Bank of Mongolia), a proposal to limit the expansion of fiscal expenditure will be developed based on the following three key indicators. This involves establishing a legal framework for transitioning to a new structure where Parliament approves the State Monetary Policy Guidelines that incorporate (1) the inflation target, (2) the fiscal expenditure limit, and (3) the amount of government securities issued to finance the loss.
• To reduce demand-side inflationary pressures arising from fiscal expansion, the central bank will actively use all available open-market operation instruments rather than relying solely on the policy rate and the reserve requirement ratio to make necessary adjustments to the monetary policy stance. Concurrently, the central bank will adhere to a flexible strategy combining monetary policy with macroprudential measures to complement the constraints of traditional monetary policy tools and to prevent excessive growth in money supply and credit.
• Monetary policy instruments alone cannot address sharp price volatility in essential goods such as meat and fuel (supply shocks) caused by supply chain disruptions. Therefore, the Bank of Mongolia will collaborate with the Government and the Financial Regulatory Commission (FRC) to establish a legal framework and market infrastructure in line with international best practices for market-based value chain financing, including factoring, trade finance, and inventory-backed financing, which are outlined in the Bank of Mongolia’s Medium-Term Strategy. This will be implemented without creating the market distortions associated with past quasi-fiscal interventions like the 'Price Stabilization Program'.
• We will enhance sample survey methodologies for measuring inflation expectations and assessing the financial conditions of economic agents, while accelerating and automating the estimation process.

By legalizing a mechanism to ensure an “optimal and prudent policy mix” between monetary and fiscal policies, the growth of money supply driven by export revenues and fiscal expansion will be reduced. Furthermore, expanding value chain financing will enhance access to working capital loans for producers and suppliers, thereby improving supply reliability and mitigating seasonal supply disruptions for meat and other food products. Consequently, these fundamental reforms will ease both demand and supply-driven inflationary pressures comprehensively, protecting households’ real income and purchasing power.