Monetary Environment Review. Q2-2023

Loose monetary conditions become a threat to price and financial stability. Monetary conditions remained loose in Q2-2023. On the one hand, the undervaluation of the Belarusian ruble neutralized, and the Belarusian ruble was overvalued at the beginning of Q3-2023. However, on the other hand, the interest rates of the credit and deposit market remained much lower than neutral levels due to the expansionary monetary policy pursued by the National Bank. Monetary stimulus led to a positive output gap in Q2-2023. The pro-inflationary pressure of domestic demand intensified, and its transfer to prices was restrained by blanket price controls. A continued combination of price controls and overly loose monetary policy will lead to an accumulation of an inflationary overhang. This will be fraught with big costs in the form of a price spike and a sharp monetary policy tightening in 2024.