Monday, November 27, 2017

Kazakhstan maintains rate as real interest rate neutral

      Kazakhstan's central bank retained its base rate at 10.25 percent, saying inflation is forecast to remain within the bank's target range despite an acceleration in October.
      The National Bank of Kazakhstan (NBK) also said the decision to maintain the rate reflects a neutral monetary policy stance and a real interest rate that is maximum 4 percent, which corresponds to the long-term potential economic growth rate of the country.
       The NBK has cut its rate by 175 basis points this year and by 675 points since embarking on an easing cycle in May 2016. The last rate cut came in August when the NBK changed its dovish stance.
        Kazakhstan's inflation rate accelerated to 7.7 percent in October from 7.1 percent in September  but the central bank said it remains within its target range of 6-8 percent and the rise is mainly due to short-term factors, such as higher fuel prices, and a seasonal rise in vegetable prices as evidenced by an "insignificant" rise of in core inflation of 0.2 percentage points.
        Inflation one year from now forecast at 6.9 percent following higher energy and food prices but inflation expectations remain within the lower inflation target range for end-2018 of 5-7 percent, the NBK added.
        Economic activity in Kazakhstan continues to recover, with the short-term indicator rising by 5.4 percent in the 10 months of the year, the NBK said.
        Kazakhstan's Gross Domestic Product grew by 4.3 percent in first nine months of this year. In August the NBK raised its 2017 growth forecast to 3.1 percent from a previous 2.8 percent.
        The government is hoping to raise growth to 5.5 percent by 2021 on the back of higher oil production and foreign investments.
      After sliding from May through October, the exchange rate of the tenge has risen in the last month, helped by the central bank's statement on Oct. 9 that it would sell more than US$1 billion from the assets of the National Fund - known as a rainy day fund - on the domestic market.
       In addition, the NBK's chairman, Daniyar Akishev, was also quoted as saying the state pension fund may also sell some foreign currency. The central bank manages both funds.
       The tenge hit 345.6 to the U.S. dollar on Oct. 5, down 10 percent from late May, with the move described as speculative by the central bank, which also said it was undervalued.
       Since Oct. 5 the tenge has bounced back and was trading at 328.8 to the dollar today, up 1.4 percent this year.
        Oil-exporting Kazakhstan, which stretches from the Caspian Sea to Mongolia, has a recent history of currency volatility. In August 2015 the central bank was forced to abandon its dollar peg policy as the tenge plunged in response to the fall in crude oil prices.
        But since January 2016 the tenge has been trending upward.

        The National Bank of Kazakhstan issued the following statement:

"The National Bank of Kazakhstan has decided to keep the base rate at 10.25% with a corridor of +/-1%. The annual inflation rate has accelerated in October; however it remains within the target range and matches the forecasted estimates of the National Bank. The inflationary risk from the external sector still exists. Additionally, it is favored to keep the neutrality of the monetary policy conditions.
The inflationary processes have accelerated to the level of 7.7% in the annual terms in October (7.1% in September), yet the annual inflation continues to remain within the target range of 6-8% in 2017. The dynamics of inflation mainly derive from the short-term factors – the rise of energy fuel prices (gasoline, diesel, coal) due to temporary supply reduction and of vegetables prices (seasonal increase of the prices), as evidenced by insignificant increase of the core inflation (by 0.2 p.p.). The risks of the secondary effect of the increase in the energy prices may persist in the short-run period and may cause the rise of the inflationary expectations. Nevertheless, the annual inflation rate according to the estimates of the National Bank will remain within the target range of 2017. Inflationary expectations of the households demonstrated the signs of the increased volatility that reflects the high share of the adaptive component. Thus, the quantitative assessment of the inflation for a year ahead has risen to 6.9% following the increase of the energy and food prices. At the same time inflationary expectations remained within the target range of inflation, which is set at the lower level for the next year – 5-7% at the end of 2018.
The situation in the external commodity markets shows a pattern of stability. The growth and inflation rates in the countries-main trading partners along with the level of the external food prices are considered as favorable from the point of view of the impact on the demand for export of Kazakhstan and on the inflation. The tendency of the increase is being observed in the dynamics of the oil prices starting June of 2017. However in medium term the risks of the volatility may occur, increasing the uncertainty regarding the future periods.
The economic activity continues demonstrating the recovery. The short-term economic indicator, which characterizes the aggregate supply in the country, increased by 5.4% in 10 months of 2017, however the growth remains unsteady in the different sectors of the economy.
The decision on the unchanged level of the base rate reflects the reasonability of maintaining the neutrality of the monetary policy conditions and the level of the real interest rate on the level not higher that 4% that corresponds to the long-term potential economic growth rate.
The next decision on the base rate will be announced on January 15, 2018 at 17:00 Astana time."


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