Bank of Mongolia has announced one-week central bank bills’ rate to be the policy rate since July 2007.
A movement in the policy rate of Bank of Mongolia causes expectations of a change in the deposit rate and thus the lending rate of commercial banks. In addition to indicating in which direction the monetary policy is changing /easing or tightening/, a change in the policy rate of Bank of Mongolia also serves the role of a leading indicator for interbank market rates. In other words, the weighted average rate of interbank market trading is expected to be set at an approximately similar level as the Bank of Mongolia’s policy rate. This security with fixed rate is traded by the Bank of Mongolia on the interbank market every Wednesday.
An increase in the policy rate of Bank of Mongolia aims to decrease inflationary pressures, to slow down the rapid growth of monetary and credit aggregates, to keep them at an appropriate level and to avoid overheating. However when there are indications of economic growth slowing down, the central bank lowers its policy rate and the cost of money in order to encourage loan issuance and spending and therefore, to recover the economy. Initially, when Bank of Mongolia introduced the policy rate, it was set at an annual rate of 6.4%. Then the policy rate was raised by 1 percentage point in October and November 2007, 1.35 percentage points in March and 0.50 percentage point in September 2008 to reach 10.25%. In November 2008, the policy rate was reduced to reach 9.75%. Due to the worldwide financial and economic crisis in the end of 2008 and the beginning of 2009 directly affecting Mongolian economy and the annual inflation being shot up to 34 percent, Bank of Mongolia raised the policy rate to 14% in March 2009. Afterwards, Bank of Mongolia took measures to cut the policy rate in May, June and September 2009 to reach 10%.
Owing to the hardship of zud during the winter of 2010 and the commencement of cash issuance by the Human Development Fund to citizens on April of the same year, supply and demand-driven inflation spiked and the core inflation rose. Thus, Bank of Mongolia raised the policy rate by 1 percentage point to reach 11% in May 2010. On 27th of April 2010, indications of overheating such as, core inflation growth and excess money supply starting to be present which caused the policy rate to be subsequently raised by 0.50 percentage point in order to reach 11.5%.
During the period of March to July 2011, core inflation was constantly on the rising trend due to the continuation of cash issued by the Human Development Fund, large amount of budget expenses being incurred, an increase in the private sector demand as well as a rise in administered prices of particular goods. Therefore, Bank of Mongolia took measures to raise the policy rate by 0.25 percentage point to 11.75% on 24th of August and by 0.50 percentage point to 12.25% on 25th of October 2011.
In the year of 2012, due to factors such as fiscal expansion, continued cash issuance to citizens and rising demand and supply-driven inflationary pressures, the policy rate was raised by 0.50 percentage point to 13.25% on 17th of April 2012.
As of 25th of January 2013, expectations of the inflation outlook consistent with its target, and expected decreases in the demand-pull inflationary pressure and supply-driven inflation have enabled to reduce the policy rate by 0.75 percentage point to reach 12.5%.
As of 5th of April 2013, the monetary policy rate was cut by 1 percentage point to 11.5% for the purpose of increasing domestic credits and investments, supporting the real sector and stimulating business activities.