Kazakhstan's central bank left its base rate unchanged at 15.00 percent but said if risks recede it would not rule out further rate cuts, with the size of those cuts depending on the country's response to external shocks, the forecast for inflation and the foreign exchange market.
The National Bank of Kazakhstan last month cut its rate by 200 basis points following rate hikes totaling 500 basis points since introducing a new base rate in September 2015.
The central bank noted that inflation was within the expected trend, demand for the tenge currency continues to recover while economic activity and domestic demand continue to decline, exerting a negative impact on economic growth.
Kazakhstan's inflation rate rose slightly to 16.7 percent in May from 16.3 percent in April while the tenge has been relatively stable since early April.
As of end-April, the central bank said the share of foreign currency deposits declined to 72 percent of household deposits and to 53 percent for corporate clients with tenge-denominated lending rising for the first time in April since October 2015.
In response to the fall in oil prices and Russia's economic crises, the tenge came under pressure last year, with many households shifting their assets to U.S. dollars. Last August the central bank then floated the tenge as it moved toward inflation targeting, resulting in an immediate drop in its value of 25 percent.
Today the tenge was trading at 335 to the dollar, up from a low of 391 on Jan. 21 and an appreciation of 1.6 percent since the start of this year.
The National Bank of Kazakhstan issued the following statement:
"The National Bank of Kazakhstan has decided to keep the base rate unchanged at 15%
with an interest rate corridor of +/- 1%. The decision reflects the balance of risks to financial
stability that stem from high costs of funding on the one hand and risks to price stability in the
medium-term on the other hand.
In more detail, the decision reflected the following considerations.
Demand for Tenge continues to recover. Households persist in net selling of foreign
currency bills. Net conversion of foreign currency deposits to tenge deposits continues. At end-April
2016 the share of foreign currency deposits declined to 72% for households deposits and
to 53% for corporate clients. April 2016 also marked first increase in Tenge-denominated
lending since October 2015.
Inflation remains within the expected trend. NBK’s inflation expectation survey shows
almost no change in May 2016. Only 37.7% of the respondents expect higher or the same level
of inflation (in April 2016 at 37.1%).
Economic activity and domestic demand indicators continue to decline, exerting a
negative impact on economic growth. Industrial production indicator for January-April 2016
declined. High investment demand and rising public sector spending partially offset the
negative impact of the terms of trade shock.
After the NBK lowered the base rate and narrowed the interest rate corridor on May 6,
2016, monetary conditions eased somewhat. Money market rates remain at the floor of the
interest rate corridor. A wider surplus of primary liquidity persists due to the continued
conversion of foreign exchange deposits into tenge deposits as well as due to fiscal factors.
External and domestic risks remain. This may affect foreign currency market, money
market and inflation expectations. After the base rate was lowered, the cost of hedging foreign
currency risks has not risen and remains below the money market rates.
Should the risks recede and provided that emergent trends are confirmed, further cuts
cannot be ruled out. The size of the cut will depend on the response of the economy to the
external shocks and monetary policy shocks, including, but not limited to, lower medium-term
inflation forecast, the cost of hedging foreign currency risks, and currency preferences of bank
The next decision on the base rate will be announced on July 11, 2016 at 17.00 Astana