March 23, 2018 / 6:59 AM / a month ago

UPDATE 1-Mongolia cuts key rate in bid to stimulate economy

* Benchmark cut to 10 pct from 11 pct; 2nd cut in 3 months

* Inflation within target range, growth the priority

* IMF has forecast growth of 5 pct this year, 6.3 pct in 2019 (Adds quotes, details, background)

ULAANBAATAR, March 23 (Reuters) - Mongolia’s central bank on Friday cut its policy interest rate by one percentage point to 10 percent, the second reduction in three months as it seeks to stimulate an economy recovering from a 2016 financial crisis.

It also reduced the reserve requirement ratio for commercial banks to 10.5 percent of tugrik deposits, from 12 percent.

On Dec. 25, the policy key was also cut by one percentage point.

B. Bayardavaa, director of the Bank of Mongolia’s monetary policy department, said that as inflation was below its target level, the central bank had decided to cut the benchmark again.

“Decreasing interest rates will reduce the costs in the banking sector and support the economy,” he said. “Inflation allows us to make this decision.”

In February, the annual inflation rate was 6.9 percent. The target for this year is 8 percent.

“Although inflation is slowly increasing due to the economic recovery and rising demand, the yearly inflation rate is likely to stay at the targeted level,” the central bank said in a statement.

Mongolia has some of the world’s highest interest rates, averaging 19.4 percent in January, according to the central bank. The high rates have reduced economic activity and hurt small businesses, analysts say.

Lawmakers have been trying to impose an interest rate cap on banks amid fears that high rates are holding back growth.

After a 2011-2013 boom, Mongolia’s growth slowed considerably as a result of declining foreign investment and falling commodity prices. This cut 2016 GDP growth to 1 percent and left the country at risk of defaulting on its debts.

A collapse in its tugrik currency in the summer of 2016 forced the central bank to hike the benchmark rate to 15 percent and forced Mongolia to turn to the International Monetary Fund for assistance.

Mongolia agreed to a $5.5 billion economic bailout from the IMF last year as part of its efforts to relieve debt pressures and stabilise the currency.

The IMF said last month Mongolia’s economy is projected to grow 5 percent in 2018 and 6.3 percent next year, helped by foreign coal sales and improved domestic demand. (Reporting by Munkhchimeg Davaasharav and Terrence Edwards; Writing by David Stanway; Editing by Richard Borsuk)

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