The Monetary Policy Committee of Mongol Bank increased the policy rate by 0.5 percentage points to 12.5 percent at its irregular meeting on August 12, citing accelerating core inflation and mounting external price pressures. The committee also raised the required reserve ratio for banks’ tugrug deposits by 0.5 percentage points, to 14.5 percent. The decision followed a review of the current state of inflation, the economy, banking and financial markets, and the domestic and external environment and risks facing the country.
Governor of the bank S.Narantsogt mentioned that the tightening was intended to stabilize inflation expectations, limit the secondary effects of supply-driven price increases, and keep the tugrug yield aligned with the central bank’s policy objectives. He described the move as a preventive step rather than a reaction to an already-destabilized outlook, aimed at heading off a broader spillover in prices before it takes hold.
Annual inflation stood at 13 percent nationwide and in Ulaanbaatar in July, driven mainly by higher prices for fuel, food and state-regulated goods and services. Of that total, food prices contributed 6.5 percentage points, fuel 1.2 percentage points and government-regulated goods and services 0.8 percentage points, according to central bank data. Officials noted that this marks the fifth consecutive month in which supply-side shocks have pushed up the headline inflation rate.
More concerning to policymakers, S.Narantsogt highlighted, was the behavior of core inflation, which strips out volatile food and energy prices and is generally seen as a better gauge of underlying price pressure. Core inflation had been climbing only gradually since the start of the year but accelerated more than expected in July, rising 0.8 percentage points from the previous month to reach 6.9 percent.
He underlined that the acceleration suggests supply-side pressures are no longer confined to a narrow set of goods and may be starting to feed into the cost of services and other products. Left unaddressed, he warned, this kind of spillover risks unanchoring inflation expectations and prolonging elevated price growth well beyond what the current shocks alone would justify, which is why the committee judged that preventive action was needed now rather than at its next scheduled meeting.
Domestic fuel prices rose again in July, with AI-92 gasoline up 250 MNT, AI-92 Euro gasoline up roughly 200 MNT, and AI-95 gasoline up 63 MNT. S.Narantsogt linked much of the pressure on fuel and broader external prices to ongoing geopolitical conflict, which has also fueled supply uncertainty and expectations that major central banks abroad will raise their own policy rates in response. Looking further ahead, he said global oil prices are expected to ease gradually as tensions in the Middle East subside toward the end of 2026, with prices approaching pre-conflict levels by 2028. In the meantime, he cautioned, elevated and uncertain fuel supply is likely to keep affecting core inflation indirectly, through higher transportation, service, and production costs, on top of its direct effect at the pump.
On food prices, the governor struck a more optimistic note. He emphasized that meat prices have already begun to decline as supply increased following the Naadam Festival, and that both meat and vegetable supplies are expected to increase further this month, which should help bring food inflation down and stabilize it in the near term.
S.Narantsogt said the central bank’s baseline expectation is that inflation will gradually decline and re-enter the target range by the middle of next year, assuming no additional supply shocks emerge. He was careful to flag the risks around that outlook, however, warning that a prolonged disruption to fuel supply driven by geopolitical uncertainty, combined with sharper-than-expected increases in foreign prices, could push inflation higher than currently projected. It was this balance of risks, he said, that ultimately tipped the committee toward tightening policy at an extraordinary meeting rather than waiting.
Beyond inflation, the central bank’s statement pointed to continued strength in the broader economy. Gross domestic product grew 7.3 percent in the first five months of 2026, a pace officials attributed largely to high activity in the mining sector and the transport sector that supports it. Growth in sectors less dependent on mining remained comparatively subdued, underscoring the economy's continued reliance on extractive exports. That reliance was also evident in the external accounts. Export revenue rose 58 percent year on year in the first half of the year, driven by a 51 percent increase in coal exports and a 97 percent jump in copper concentrate exports, alongside sharply higher export volumes and rising prices for both commodities. The resulting improvement in the terms of trade helped push the balance of payments into a surplus of 567 million USD for the first half of the year, and foreign exchange reserves climbed to a historic high of 7.9 billion USD, further strengthening reserve adequacy.
