Kazakhstan Monetary Policy July 2016


Central Bank cuts policy rate as risks on inflation moderate

The National Bank of Kazakhstan (NBK) announced at its 11 July meeting that it had decided to cut the one-day repo rate—also known as the base rate—by an additional 200 basis points to 13.00% and indicated that, “further actions on the base rate will depend on the actual inflation, its deviation from the forecast, inflation expectations of [the] population and market participants, and currency preferences of economic agents.” The Central Bank has cut the monetary policy rate by a total of 400 basis points since its last hike in February. On 1 February, the Bank hiked the rate to 17.00% in response to heightened volatility in financial markets and with the aim to restore confidence in the national currency.

Although inflation crept up to the highest level in nearly eight years in June, the Central Bank stated that it had expected this increase and that the risks of a further acceleration in the inflation rate, under the current conditions, are “minimal”. The Central Bank pointed out that it forecasts “with a high probability” that inflation will drop and land within the upper band of its inflation target range of between 6.0% and 8.0% at the end of 2016. The Bank went on also to say that, “taking into account the time lag effect of the base rate on inflation, which is estimated to take up to one year, the decision to reduce the base rate confirms the confidence that inflation will remain within the target band over the horizon of twelve months and up until the end of 2017.”

The NBK pointed out that its decision to cut interest rates in July reflected both the recent rally in oil prices from the multi-year lows registered earlier this year and the stabilization in global financial markets in the last four months. These developments have prompted foreign and resident investors to increase their demand for Kazakh assets denominated in local currency in both the foreign exchange market and also in banks’ deposits. Moreover, the Central Bank went on to recognize that the UK referendum to leave the EU has caused short-term uncertainty and consequently volatility in financial markets, but that a direct impact of Brexit on the Kazakh economy is expected to be only limited. Other factors behind the policy decision are the result of the Bank’s survey on inflation expectations, which showed that a more moderate increase in prices is expected in the near term, that inflation is also slowing in Kazakhstan’s trading partners—particularly in Russia—and that the current deceleration of the economy is limiting a rise in prices.

The Bank concluded that a further cut in the main monetary policy rate will depend on the evolution of inflation and on “signals indicating the convergence of inflation to the target range”. The Central Bank kept its inflation target range at between 6.0% and 8.0% for 2016 and 2017. For 2018, the Bank lowered the target to a range of between 5.0% and 7.0%, while long-term inflation is targeted at a range of between 3.0% and 4.0% by 2020. The next policy meeting is scheduled for 15 August.

FocusEconomics Consensus Forecast panelists expect the Bank to cut interest rates later in the year and see the base rate ending 2016 at 11.44%. For 2017, the panel sees the base rate ending the year at 8.43%.

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Kazakhstan Monetary Policy Chart

Kazakhstan Monetary Policy July 2016 0

Note: NBK refinancing rate in %.
Source: National Bank of Kazakhstan (NBK).

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