Inflation is the most “democratic” tax. It requires no approval from Parliament. No tax bill arrives in the mail. Yet everyone pays it. You pay this “tax” when buying groceries in the morning, fueling up your car, paying rent, taking out a loan, or even trying to save a few tugriks.
In Mongolia, inflation has once again become the most pressing issue. But even more than inflation itself, the way it is being fought demands attention.
On one side is the Bank of Mongolia, responsible for price stability. When inflation rises and economic demand overheats, the Central Bank tightens monetary policy. It raises the policy rate, attempting to cool aggregate demand by slowing credit and consumption growth while encouraging savings. The Bank of Mongolia has raised its policy rate to 12.5 percent.
On the other side is the Government, which controls the state budget. As budget spending, public sector salaries, pensions, welfare, subsidies, and capital investments increase, more money and purchasing demand enter the economy. Just last week, a decision was made to increase the minimum wage by 26.3 percent to one million tugriks.
Mongolia’s economy has become like a car speeding along with one foot slamming on the brake and the other pressing down on the gas.
The Bank of Mongolia curbs demand. The Government expands demand. Who pays the price for this policy contradiction? Ultimately, we all do.
An Expensive Brake
When inflation rises, the Bank of Mongolia cannot simply sit idly by. Its most powerful tool is the policy rate. Beyond that, it relies on required reserve ratios, market liquidity management, and macroprudential policy tools targeted at credit growth.
However, tightening monetary policy does not come free of charge. As money becomes more expensive, commercial bank loans follow suit. Enterprises reconsider buying new equipment. Small businesses postpone expansion. Financing costs for construction companies surge. Households find it increasingly difficult to secure housing or consumer loans.
In other words, when fiscal policy fuels demand while monetary policy tries to rein it in, the private sector pays part of the price for fiscal expansion in the form of higher interest rates.
Yet there is another major limitation here. Raising interest rates because meat prices are surging due to supply shortages will not magically create a single new sheep.
If housing prices in Ulaanbaatar are rising because land with utility infrastructure is scarce, monetary policy cannot build sewer lines or thermal power plants.
Interest rates can curb demand, but they cannot expand supply.
Understanding this distinction is crucial. Why does this pattern keep repeating?
Inflation in Mongolia stems from three distinct layers:
- External causes: Mongolia is a small, open, heavily import-dependent economy. Fuel, equipment, consumer goods, and industrial inputs are all sourced abroad. Consequently, exchange rate fluctuations and global market prices pass through rapidly to Mongolian consumer prices.
- Structural causes: Transportation and logistics costs are high. Competition is weak in certain markets. Food supply is acutely vulnerable to seasonal and climate impacts. Energy capacity is constrained. Ulaanbaatar suffers from a deficit of buildable land connected to essential utility infrastructure.
- Policy causes: This is the most vital element. When the economy is already under inflationary pressure, sharply boosting fiscal spending means the supply of goods and services cannot catch up in time. More tugriks chase roughly the same volume of goods, driving prices up. Rising prices create demand for wage hikes. As wages and input costs climb, companies raise product prices further. Citizens, expecting things to be even more expensive tomorrow, buy more today. In this way, a single price shock transforms into a persistent inflation spiral.
Lessons from Türkiye
With inflation already elevated, Türkiye’s Central Bank cut its policy rate from 19 percent to 14 percent between September and December 2021. It sounded like a great idea on paper: cheap money, more investment, higher production, expanded exports, and more jobs.
But economic laws eventually came calling. The Lira plummeted: while one US dollar bought roughly 7–8 Lira at the start of 2021, it weakened multiple times over in the following years. Savers fled the national currency for US dollars, euros, gold, and real estate. Inflation expectations became unanchored. A year later, Turkish inflation touched 85 percent, forcing Türkiye to reverse course and aggressively tighten monetary policy.
The takeaway for Mongolia is not that “Mongolia will become Türkiye.” Rather, if society becomes anchored in the expectation that tomorrow’s tugrik will lose value compared to today’s, restoring that trust is extraordinarily costly.
Hence, Central Bank independence and policy credibility are themselves vital national economic assets.
What Should Be Done?
The answer is not simply “raise the policy rate.” Mongolia’s economic brake and accelerator need to work in the same direction.
First, fiscal policy must be held accountable for inflation. Whenever inflation is significantly above the target level, every major new fiscal expenditure—be it increases in salaries, pensions, welfare, or subsidies—must answer one question: Where does the money come from?
If an additional trillion tugriks is to be spent, which other expenses will be cut? Where will sustainable additional revenue come from? Or why is it necessary to accept additional inflation risks?
In addition, the Bank of Mongolia should publish an “Inflation Impact Assessment” for every major fiscal expansion.
Before Parliament approves an extra trillion tugriks in spending, it must address: What impact will this decision have on inflation? How long will policy rates need to stay high? How will this affect private sector lending? Doing so would clearly assign accountability.
Second, fight inflation from the supply side.
Rather than fueling consumption, the government should remove bottlenecks impeding production: energy, logistics, food storage and supply chains, market competition, transport infrastructure, and serviced urban land.
Housing is the clearest example of this.
For over a decade, Mongolia focused primarily on subsidizing mortgages. But cheap credit boosts citizens’ purchasing power; it doesn’t automatically increase the number of homes. When supply fails to expand adequately and more people compete for the same stock of housing using cheap money, part of the state subsidy inevitably transforms into housing price inflation.
Let us reverse this logic. Stop subsidizing money chasing existing apartments; support the creation of new housing instead. The newly established Housing Bank has a historic opportunity here.
Measure that bank’s success not by “How many people received cheap loans?”, but by “How many NEW, affordable housing units were added to the market through our financing?” The state handles land and utility infrastructure. The Housing Bank supports long-term construction financing and guarantees. Private companies compete to build. Commercial banks assess creditworthiness and issue mortgages.
Only then will every state tugrik work to expand supply rather than stoke price inflation.
This is also the core lesson of Singapore’s housing policy. Singapore’s secret to success was never just “cheap mortgages.” It lay in planning and generating land, infrastructure, and housing supply in bulk first, and offering citizens homeownership second. Mongolia doesn’t need to copy Singapore verbatim, but it must grasp the principle: Supply first. Financing second.
Two Pedals — One Direction
Mongolia cannot set global oil prices. We cannot decide China’s economic growth rate. Nor can we alter global interest rates.
But we can fix our own policy contradictions. The Bank of Mongolia cannot sustainably defeat inflation alone while the Government continuously inflates demand.
On the flip side, politicians cannot enact inflationary policies and then demand cheap money and low interest rates from the Central Bank.
Fiscal policy + monetary policy + supply-side reform must work in the same direction. The question is not whether the Bank of Mongolia is right or the Government is right.
Rather, it is about ensuring Mongolian citizens aren’t made to foot the bill for conflicting policies between the two.
Because a car moving with one foot on the brake and the other pressing down on the accelerator won’t travel far.
It is, however, very likely to crash.