Why the Bank of Mongolia Moved Its Policy Rate After 17 Months

The Monetary Policy Committee of the Bank of Mongolia raised the policy rate by 50 basis points to 12.5% at an unscheduled meeting on 12 August 2026, while raising the reserve requirement ratio on banks' tugrik liabilities by the same margin to 14.5%. 

Core Inflation Reaching 6.9% Drove the Decision

Inflation reached 13% nationwide in July, National Statistics Office reported. The figure holds no surprises. Inflation has risen without interruption since crossing into double digits at 10.1% in April, and the Committee held the rate throughout. 

What changed in the two months since is core inflation. This measure, which strips the most volatile food and energy prices out of the consumption basket, rose 0.8 percentage points in July to reach 6.9%.

Governor S. Narantsogt explained the significance of that number at the press conference:

"Core inflation … reaching 6.9% indicates that supply-driven price increases may no longer be confined to the prices of particular goods, and may be starting to pass through into the cost of services and other goods. Should such pass-through broaden, inflation expectations risk becoming unanchored and price growth risk persisting for longer, which makes pre-emptive policy action necessary."

This risk is not hypothetical. A household survey conducted in June found that inflation expectations had already risen. The Bank of Mongolia is therefore not responding to prices that have already gone up, but guarding against prices that have yet to rise.

Why Only 50 Basis Points?

With inflation at twice the target, 50 basis points looks like a small step. Three factors explain it.

One: two instruments. The reserve requirement obliges banks to hold a set share of the funds they take from customers at the Bank of Mongolia rather than lending them out. The rate constrains the price of credit while the requirement constrains its quantity. The ratio was raised from 13% to 14% in January, so it has tightened by a cumulative 150 basis points over seven months.

Two: the nature of the shock. A policy rate cannot remove a supply constraint. Over-tightening risks suppressing demand and growth without bringing prices down. The Committee also maintained its expectation that food inflation will ease from this month.

Three: supportive fundamentals. Export revenue rose 58% in the first half of the year, the balance of payments posted a surplus of USD 567 million, and foreign reserves reached a record USD 7.9 billion. With no accumulated exchange rate pressure, the case for a larger step is weaker.

What the IMF Said a Week Earlier

The timing may not be coincidental. On 6 August, in concluding its 2026 Article IV consultation, the IMF Executive Board advised the Bank of Mongolia to maintain a tight policy stance while standing ready to tighten further should risks of unanchored inflation expectations and second-round effects emerge. A week later, the Bank raised its rate on the basis of precisely those two risks.

Outlook

Governor S. Narantsogt stated that the economic outlook will depend heavily on "how geopolitical conditions, commodity prices, external demand, fiscal policy and the implementation of domestic construction projects change." Of the five factors he named, three are matters of the external environment while two will be determined by government decisions. In other words, the central bank is saying indirectly that it will not carry the fight against inflation alone.

Both of the factors that rest with the government, fiscal policy and the implementation of domestic construction projects, will be settled through the 2027 budget debated in the fall parliamentary session. If the budget is passed on an expansionary footing, monetary policy will be tightening while the two policies pull in opposite directions. In that case the entire burden of restraining demand falls on the policy rate and the reserve requirement, and the Bank of Mongolia will need to act again.

The economy's structure sharpens the question further. Growth reached 7.3% in the first five months of the year, yet sectors with little exposure to mining remain subdued. If fiscal expansion adds to demand, the weight of tightening will fall hardest on precisely those sectors. The decisive event ahead is therefore likely to be not a Bank of Mongolia meeting but the fall session of parliament.