Monday, October 15, 2018

Kazakhstan raises rate 25 bps on risks of higher inflation

      Kazakhstan's central bank raised its base rate by 25 basis points to 9.25 percent due to an increase in the risks of higher inflation from the tenge's depreciation, with future decisions about the base rate dependent on how inflation compares with the bank's target.
      It is the first rate hike by the National Bank of Kazakhstan (NBK) since February 2016 when the base rate was raised to 17.0 percent to curb rising inflation which hit 17.7 percent in July that year.
      In May 2016 the NBK began lowering the rate and remained in an easing stance until June this year when it switched to a neutral policy stance.
       Between May 2016 and June 2018 the NBK cut its base rate by a total of 800 basis points, including four cuts this year by a total of 125 points.
      But in September the central bank said inflation was falling slower than it had expected while economic activity was continuing to strengthen and the tenge was depreciating.
      While the central bank said it was maintaining the current interest corridor of 1 percentage points plus/minus around the base rate, it also said it was considering narrowing the boundaries of the corridor to improve the operational effectiveness of its monetary operations so the tenge overnight rate, TONIA, will remain within the target corridor and converge to the target rate.
       Headline inflation in Kazakhstan rose to 6.1 percent in September from 6.0 percent in August - a level the central bank described as moderate - and is forecast to remain within the 2018 inflation target of 5.0 - 7.0 percent.
       In 2019 the central bank said it expects inflation to "smoothly enter the new corridor" of 4.0 - 6.0 percent and remain close to the upper limit of 6.0 percent.
       An increase in exchange rate volatility had triggered a rise in inflationary expectations to 6.4 percent in September from 5.6 percent in July and domestic demand is continuing to expand due to rising incomes.
       An increase in the minimum wage will add inflationary pressure while a economic activity remains above the country's potential, the NBK said, adding the higher base rate will help increase the demand for tenge assets and help keep monetary conditions close to neutral.
       In April this year the tenge was hit by worries over a fallout of new U.S. sanctions on Russia and since then it has continued to depreciate as U.S. interest rates rise.
      Today the tenge was trading at 368.3 to the U.S. dollar, down 9.6 percent this year.
       In August 2015 the tenge plunged following the central bank's move to a floating exchange rate regime in response to capital outflows and the conversion of many tenge bank deposits to foreign currency. Oil accounts for about 60 percent of Kazakhstan's exports and over 10 percent of its Gross Domestic Product.



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