Source: Ardiin Erkh    Date: May 12, 2010

The Central Bank raised on Monday its policy loan interest rate from 10% to 11% with effect from May 12, to counter inflation which now stands at 11.4% as against 8.4 percent in January. The rising inflation has been attributed to the distribution of MNT70,000 to every citizen, to the massive loss of livestock that has raised the price of meat by 64 percent, and to the announcement that salaries would go up by 30 percent. Economists have been worrying that if the Central Bank does not act, inflation might reach 30-40 percent by the end of this year.

The Bank raised its policy loan rate to 14 percent in the fourth quarter of 2008. Since May 2009 it brought this down three times bringing it to the present 10%. The reduced money supply may protect the economy from hyper inflation, but it is certain to hamper development of small and medium enterprises.

Mr. B.Lkhagvajav, press representative of Mongol Bank, told media the decision aimed at reducing money supply to the market. Commercial banks will need to raise their interest rate by at least one percent, so there will be fewer loans.  He said this was also a pre-emptive move as the announced salary rise and possible restoration of some welfare allowances might lead to further inflation. The Bank feels there will be no negative effect if allowances are paid to not more than one third of the population.

He did not rule out another increase after watching how this decision affects the economy.