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ENHANCING THE EFFECTIVENESS OF MONETARY POLICY
TRANSMISSION IN UZBEKISTAN
Nazarova Gulhayo Ikram kizi
Tashkent State University of Economics
Teacher Assistant at the department of
“Macroeconomic Policy and Forecasting”
gulhayonazarova97@gmail.com
Abstract
: This article analyzes the mechanisms for enhancing the transmission of monetary
policy in Uzbekistan. It examines the Central Bank’s reforms—particularly interest rate policy,
development of the interbank market, and the adoption of inflation targeting - as critical tools to
improve the effectiveness of monetary policy on economic dynamics. Drawing on statistical
data, the paper explores existing challenges and proposes strategic directions to strengthen
monetary instruments and foster sustainable economic growth.
Keywords:
Monetary policy, transmission mechanism, inflation targeting, Central Bank,
interest rate, economic growth, financial stability.
Аннотация:
В статье рассматриваются направления повышения эффективности
трансмиссионного механизма денежно-кредитной политики в Узбекистане. Особое
внимание уделено мерам, предпринимаемым Центральным банком, включая переход к
режиму инфляционного таргетирования, развитие межбанковского денежного рынка и
совершенствование процентной политики. На основе анализа макроэкономических и
статистических данных обоснованы предложения по укреплению роли процентного
канала, повышению прозрачности и предсказуемости монетарной политики, а также по
созданию благоприятных условий для устойчивого экономического роста.
Ключевые
слова:
денежно-кредитная
политика,
трансмиссионный
механизм,
инфляционное таргетирование, Центральный банк, процентные ставки, экономический
рост, финансовая стабильность, межбанковский рынок.
Introduction.
In recent years, Uzbekistan has embarked on a comprehensive
transformation of its monetary policy framework, aiming to improve macroeconomic stability
and foster sustainable economic growth. Central to this reform process is the enhancement of
monetary policy transmission mechanisms, which play a pivotal role in translating central bank
decisions into real-sector outcomes. The move towards a more market-oriented and transparent
monetary policy—especially the gradual adoption of inflation targeting—has marked a
significant shift in Uzbekistan’s economic governance. However, the effectiveness of monetary
policy transmission remains a complex challenge, influenced by various structural, institutional,
and financial market factors. In particular, underdeveloped interbank markets, limited financial
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ISSN: 2692-5206, Impact Factor: 12,23
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Journal:
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deepening, and asymmetric information continue to hinder the efficient pass-through of policy
signals to interest rates, credit conditions, and ultimately investment and consumption.
Main part.
In its pursuit of a more effective monetary policy framework, the Central
Bank of Uzbekistan (CBU) has initiated a set of deep structural reforms aimed at strengthening
operational mechanisms and providing clear, consistent policy signals to market participants. A
central objective of these efforts is to enhance the transmission of monetary impulses to the real
economy by improving the responsiveness of key financial markets and institutions. One of the
core strategies involves the development of the interbank money market and the establishment
of a robust REPO (repurchase agreement) infrastructure. Strengthening these platforms is
essential for reinforcing the interest rate channel of monetary transmission, as it allows
commercial banks to manage liquidity more efficiently and actively participate in the formation
of short-term market interest rates. As banks become more responsive to central bank signals,
the speed and precision with which monetary policy affects broader macroeconomic
variables—such as investment, inflation, and output—will significantly improve.
Another important challenge being addressed is the misalignment between the yield of
central bank securities and the upper bound of the interest rate corridor. At present, yields on
government and central bank securities tend to cluster near the upper limit of the policy corridor,
which risks distorting the clarity and predictability of monetary signals. To mitigate this, the
CBU plans to realign securities yields with market-based mechanisms by gradually increasing
the share of deposit auctions and phasing out rigid interest rate caps. The underlying objective
is to ensure that the pricing of monetary instruments is guided by market expectations rather
than administrative controls, thereby enhancing transparency and policy credibility.
Furthermore, the Central Bank is moving away from acting as a price-setter in its securities
market operations, instead positioning itself as a price-taker within a market-determined
framework. A critical step in this direction was taken in March 2024, when the interest rate
ceiling on central bank bonds was extended to the upper boundary of the policy corridor. Future
plans include the complete removal of such limits, enabling a flexible pricing system driven by
the natural interplay of demand and supply. This shift is expected to strengthen competition
within financial markets and improve the integration of monetary policy with broader market
dynamics. An additional reform involves extending the operational hours of overnight liquidity
facilities. Currently, overnight transactions are executed between 10:00 and 16:00; however,
with most interbank settlements occurring until 17:00, this window may limit the flexibility of
commercial banks to respond to liquidity needs in real-time. By extending the operational
window, the Central Bank aims to enhance liquidity management, improve the smooth
functioning of payment systems, and reduce end-of-day volatility in money markets.
Collectively, these initiatives reflect a coherent effort to modernize Uzbekistan’s monetary
architecture. By advancing toward a more flexible, market-based, and analytically grounded
framework, the Central Bank is not only strengthening monetary policy transmission but also
contributing to long-term macroeconomic stability and investor confidence. In response to the
structural timing gap between transaction windows and interbank settlement deadlines, the
Central Bank of Uzbekistan (CBU) is considering the extension of the overnight operations
window by an additional 30 minutes beyond the current 16:00 closing time. This expansion
would allow commercial banks to manage end-of-day liquidity with greater flexibility, thereby
enhancing systemic financial stability. By providing extended access to central bank facilities,
the policy aims to mitigate liquidity bottlenecks during critical operational hours. Currently,
interbank money market transactions are primarily conducted during official banking hours,
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usually up until the conclusion of the payment day. However, allowing such operations to
continue for an additional 15 minutes after the formal settlement window closes is expected to
yield significant benefits. In particular, commercial banks would gain an opportunity to
redistribute short-term liquidity among themselves before resorting to overnight lending from
the Central Bank. This sequence reduces excessive reliance on central bank interventions and
fosters a more market-oriented liquidity allocation mechanism. Another crucial reform is the
transformation of overnight operations into a "true overnight" structure. Presently, such
transactions are carried out based on mutual agreements between banks, often settled flexibly
within a 24-hour window. This practice differs from the more standardized mechanisms used by
the Central Bank, leading to inconsistencies in how short-term liquidity is priced and managed.
Institutionalizing real overnight operations—where transactions are repaid at the beginning of
the next working day—will enhance predictability, standardization, and alignment with the
Central Bank’s monetary stance. Looking ahead, the introduction of an intraday credit facility is
also under consideration. This facility would allow banks to access interest-free, collateralized
credit during the day, specifically designed to bridge temporary liquidity shortfalls and ensure
the uninterrupted functioning of the payment system. By addressing liquidity mismatches
within the day, this tool would reduce operational risk and bolster trust in financial market
infrastructure. Furthermore, it would facilitate a smoother repayment of overnight deposits at
the beginning of the next business day, thereby reducing liquidity management pressures. In
addition to these operational enhancements, the CBU is also evaluating the implementation of a
new instrument known as "fine-tuning operations." Although not yet applied in practice, these
short-term open market operations would serve as an essential tool for managing unexpected
liquidity fluctuations. Their use would enable the Central Bank to respond promptly to
deviations from targeted monetary conditions, improving the precision and flexibility of policy
interventions. Taken together, these reforms represent a significant shift toward a more efficient,
market-responsive, and transparent monetary policy framework in Uzbekistan. By aligning
operational practices with international standards and focusing on the robustness of
transmission channels, the Central Bank aims to create a more resilient financial system—one
capable of withstanding shocks while supporting stable and sustainable economic growth.
Uzbekistan's monetary policy has undergone a substantial transformation over the past
decade, transitioning from administratively controlled interest rate frameworks to a market-
based inflation-targeting regime. This shift has been instrumental in reinforcing the
transmission of monetary impulses to the broader economy, though several structural and
operational bottlenecks persist. One of the most significant achievements has been the
strengthening of the interest rate channel, evidenced by the increased responsiveness of
inflation and investment dynamics to changes in the policy rate. Since 2022, tighter monetary
policy measures, including adjustments to the refinancing rate and liquidity operations, have
successfully helped in curbing inflation, which had previously been driven by fiscal expansion,
rising import prices, and currency depreciation. At the operational level, the Central Bank of
Uzbekistan (CBU) has taken meaningful steps to align its policy instruments with market-based
benchmarks. The development of the interbank REPO market and reforms aimed at reducing
direct administrative control over interest rates have improved the transmission efficiency. The
move to gradually abolish the upper bounds of the interest rate corridor for government
securities is another key reform that ensures more transparent and predictable monetary signals
to market participants. However, certain frictions remain, notably in the weak development of
secondary financial markets and limited monetary depth. For instance, the overnight operations
INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 06,2025
Journal:
https://www.academicpublishers.org/journals/index.php/ijai
page 489
and interbank transactions are often concentrated within narrow time windows, limiting banks'
flexibility in managing short-term liquidity. The proposal to extend operating hours and
introduce “real overnight” instruments is likely to address these constraints and enhance the
transmission through the liquidity channel. Moreover, expectations management—crucial under
inflation targeting—is still in its formative stage. While inflation forecasts have become more
transparent, anchoring public and market expectations remains challenging due to exchange rate
volatility and external shocks. The Central Bank’s consistent communication strategy, paired
with analytical forecasting tools, will be critical in shaping rational inflation expectations and
improving the credibility of monetary policy. In addition, future enhancements such as
introducing intraday credit facilities and institutionalizing fine-tuning operations could provide
the flexibility needed to deal with unexpected liquidity imbalances. These tools, commonly
used by advanced central banks, will allow Uzbekistan to move closer to an agile and
responsive monetary system capable of buffering both internal and external shocks.
1-picture. Dynamics of Gross Domestic Product (GDP) of the Republic of
Uzbekistan
.
According to the preliminary estimate by the Statistics Agency of Uzbekistan, the
country's Gross Domestic Product (GDP) in current prices reached 1,454,573.9 billion soums in
2024, reflecting a real growth rate of 6.5% compared to 2023. Additionally, the GDP deflator
index stood at 113.3%, indicating moderate inflationary pressure in the broader economy.
These figures highlight a period of robust economic expansion, which coincides with the
ongoing modernization of Uzbekistan’s monetary policy framework.The observed economic
growth suggests that the monetary transmission mechanism—through which interest rate
changes impact aggregate demand—has become more responsive. In particular, the real GDP
growth, coupled with a relatively contained inflation rate, signals that the Central Bank’s use of
interest rate instruments, repo operations, and open market interventions is increasingly aligned
with macroeconomic objectives. Moreover, the GDP deflator, which measures the price level of
all domestically produced goods and services, points to a sustained but manageable inflation
dynamic—offering further credibility to the inflation-targeting approach gradually being
adopted by the Central Bank. This data-driven progress underscores the importance of
strengthening financial market infrastructure—especially interbank liquidity tools and
benchmark interest rates—to enhance the predictability and efficiency of monetary signals. As
1
Independently compiled by the researcher based on statistical data.
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Journal:
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page 490
the GDP expands, a more sophisticated and transparent monetary transmission system becomes
essential to ensure that policy rate adjustments effectively influence lending, investment
decisions, and inflation expectations. Therefore, improving communication strategies,
increasing the role of market-based interest rates, and adopting a more flexible operational
framework remain critical to reinforcing the link between monetary policy actions and real
economic outcomes in Uzbekistan.
Conclusion.
In summary, although Uzbekistan has made significant strides in
strengthening its monetary policy transmission mechanisms, the long-term effectiveness of
these reforms will largely depend on the Central Bank’s ability to further develop financial
markets, uphold consistent policy implementation, and solidify trust in its inflation-targeting
framework. Achieving these goals will require a sustained commitment to institutional
modernization, the expansion of market-based instruments, and the integration of real-time
economic data into policy formulation. By prioritizing these areas, Uzbekistan can enhance the
responsiveness of its monetary system and support a more stable and inclusive path toward
sustainable economic growth.
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