Mongolia Cuts Interest Rates Second Time This Year to Aid Growth

Mongolia’s central bank cut interest rates for a second time this year to bolster economic growth as inflation eases and foreign investment falls.

The Bank of Mongolia reduced its policy rate to 11.5 percent from the previous 12.5 percent effective April 8, according to a statement posted to its website today. The cut is aimed at increasing domestic credit and investments and stimulating business activities, it said.

Mongolia in January cut interest rates for the first time since 2009 after economic expansion moderated to 12.3 percent last year from a record 17.3 percent in 2011 and foreign investment fell 17 percent. Growth slowed as the price of coal, Mongolia’s biggest export, declined and the government introduced more controls on foreign ownership of mining assets.

A deceleration in the pace of inflation over the last four months and the monetary authority’s estimate for further slowing was the main reason for the cut, Sandagdorj Bold, the central bank’s chief economist, said in an interview in Ulaanbaatar today. Mongolian trade and foreign investment were also factors in the decision, he said. “We are concerned about the FDI and foreign trade environment.”

Foreign investors have criticized steps by Mongolia’s government to increase controls over the mining industry. The Business Council of Mongolia, which counts Rio Tinto Group, Peabody Energy and General Electric Co. among its members, issued a letter in January criticizing amendments to mining laws proposed by President Tsakhia Elbegdorj, saying the changes would deter investment.

The president’s proposal followed the passage of a law last year that made it more difficult for foreign companies to control strategic assets in Mongolia.

Rio Tinto

The Mongolian government and Rio Tinto, the nation’s biggest foreign investor, have also been at loggerheads over how to develop the $6.6 billion Oyu Tolgoi copper and gold mine. The two sides have spent much of this year sparring over cost overruns and management control.

Inflation eased to 11.3 percent at the end of February from 14 percent at the end of December, Bold said. The central bank expects the pace to fall further this month, he said.

“In upcoming months we think we will see downward inflation,” Bold said. “So it’s consistent with our target of eight percent inflation by the end of the year.”

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