The National Bank is aware of the potential impact on economic indicators due to prolonged excess liquidity.
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The National Bank has projected that the average inflation rate for the current fiscal year will remain within the target range despite the increase in prices of petroleum products, raw materials required for industry and some consumer goods since the war began in West Asia. In its third-quarter review of monetary policy made public on Friday, the National Bank projected that the average inflation rate will remain within the target range of 5.5 percent even though the supply chain in Nepal has also been affected by the impact of tensions in West Asia.
‘Inflation is lower than this bank’s target. However, there is a risk of pressure on inflation if global geopolitical tensions continue. The supply chain of petroleum products, raw materials required for industry and some consumer goods has been affected since the war began in West Asia,’ the National Bank said. ‘During this period (from 2082 Falgun 16 to 2083 Baisakh 11), the price of petrol in Nepal has increased by 35 percent and the price of diesel by 58 percent. However, the average consumer inflation rate up to the third quarter of the fiscal year 2082/83 is projected to remain within the annual average consumer inflation target range as the average consumer inflation rate is 2.39 percent.’
Inflation is within the target range this year, foreign exchange reserves are comfortable and inflation will remain within the target range despite some impact from tensions in West Asia, said Ram Sharan Kharel, Head of the Research Department of Nepal Rastra Bank. ‘Even though inflation is seen to be within the target range, the central bank has not used policy rates in the third review to support economic growth,’ he said. ‘The monetary policy for the next fiscal year will be introduced after one and a half months after looking at the impact of tensions in West Asia, the state of economic growth, and other conditions.’
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Similarly, the Rastra Bank has also claimed that the external sector of the economy is in a comfortable situation. The Rastra Bank has stated that the current account and balance of payments positions are in surplus due to a significant increase in remittance inflows for the first nine months of the current fiscal year, and foreign exchange reserves are continuously increasing. However, since about 40 percent of remittance inflows in Nepal are received from West Asia, if the ongoing tension in that region persists, it will be affected and there is a risk of pressure on foreign exchange reserves due to an increase in the prices of fuel and imported goods and a widening of the trade deficit, the review states. However, the foreign exchange reserves are projected to be above the bank's target to cover imports.
Although the non-performing loans of banks and financial institutions have increased moderately, the NRB expects such loans to improve with the improvement in economic activity. 'As of mid-Chait 2082, the ratio of core capital and capital fund to risk-weighted assets of banks and financial institutions is within the regulatory standards. Overall, financial stability is maintained,' the review states.
There has been a situation of excess liquidity in the financial system for the past three years. The NRB claims that the bank is alert to take necessary steps to manage the impact that prolonged excess liquidity in the financial system may have on various macroeconomic indicators.
Similarly, in the review, the National Bank has kept the monetary policy guidelines, interest rate corridor, bank rate, required cash reserves and statutory liquidity ratio, etc. unchanged. Continuing the flexible monetary policy guidelines adopted since the beginning of the current fiscal year, the National Bank projects that foreign exchange reserves and inflation will remain in line with the bank's targets. In view of the low economic growth situation, the National Bank has stated that the flexible monetary policy guidelines adopted since the beginning of the current fiscal year have been continued. 'The system for providing permanent deposit facilities to banks and financial institutions will be reviewed to make the interest rate corridor more effective,' the review states. 'The arrangements made in the monetary policy and its reviews for the current fiscal year are expected to maintain price, external and financial sector stability and help expand economic activity.'
Similarly, the tension in West Asia that began on 16 Falgun 2082 has affected the global supply chain. During this period, the price of crude oil has increased by an average of 50 percent due to damage to petroleum infrastructure and disruptions in the Strait of Hormuz. Global inflation and economic growth have been affected by the increase in the price of imported goods overall. The International Monetary Fund projects that global inflation will reach 4.4 percent in 2026, compared to 4.1 percent in 2025.
The Fund analyzes that tensions in this region, which accounts for more than 20 percent of the global petroleum market, have pushed the global economy into uncertainty. The global economic growth is projected to remain at 3.4 percent in 2026, but it is projected to be 3.1 percent due to the war. The Fund analyzes that the world will face an economic recession and high inflation if the tension in West Asia is not resolved immediately.
