Source: ResCap                       Date: 15 June, 2011

That inflation touched 15% in 2007 and peaked at 22% in 2008 in Mongolia, when production from Oyu Tolgoi and Tavan Tolgoi was still over 5 years away, is a stark reminder of a bubble that could be growing in Mongolia if close attention is not paid to inflation. Steps so far taken to tame inflation in Mongolia include recent tightening of monetary policy. In February, the reserves requirement ratio was increased to 9%, nearly double the previous 5% level. And in April, the policy rate was increased to 11.5%, the second increase in 12 months.

But less obvious to the western world is the active domestic management of food supply. In Mongolia, food prices are the main constituent of inflation and meat accounts for 40% of the food basket. Normal reserves of meat supply amount to approximately 8,000 tons annually and this year the Government had prepared around 16,000 tons. The Ministry of Agriculture and Food coordinates with municipalities to stock meat with local meat vendors or meat factories. They store negotiated amounts in their own facilities and release the stock as and when required to keep the market well supplied at all times.

Stockpiling of meat as a tool to manage inflation? In Mongolia, where tools such as fiscal policy (increasing taxes, decreasing government spending), wage control caps and labor market reforms are relatively meaningless because of their already terribly low levels, going directly to the source of the inflation problem is the inherent solution. The Central Bank estimated that inflation would have reached 15-20% by December 2011, if this kind of active inflation management had not been implemented. The outlook is now much brighter. Notwithstanding outstanding loans and money supply growth rates remaining high, annual CPI decreased to 8% in March and dropped to 5.5% in April 2011.