Monday, March 4, 2019

Kazakhstan holds rate steady after inflation eases

    Kazakhstan's central bank left its base rate unchanged at 9.25 percent, saying its concern over a deterioration of external factors did not materialize in the last 6 weeks and in the absence of shocks inflation this year should remain close to the upper boundary of its inflation target.
     It its previous policy decision from Jan. 14, the National Bank of Kazakhstan (NBK) warned it may raise its rate today if there was upward pressure on inflation from volatile oil markets and import prices from Russia.
     In October last year the NBK raised its rate by 25 basis points and monetary conditions are currently neutral.
     However, after a run-up in January, oil prices have stabilized since mid-February and Kazakhstan's headline inflation rate fell further to 4.8 percent in February, below the middle point of NBK's 2019 target corridor of 4.0 to 6.0 percent, from 5.2 percent in January and 5.3 percent in the previous 3 months.
    NBK has been lowering its inflation target in recent years, from 6.0-8.0 percent in 2016/17 to 5.0-7.0 percent in 2018 and 4.0-6.0 percent for this year, targeting inflation below but close to 4.0 percent by the end of 2020 and following years.
    Along with the lower inflation target, the central bank said inflationary expectations had gradually declined after a surge in late 2018 and were down to 4.7 percent for the next 12 months.
     While the probability of a deterioration of the external situation had declined, the central bank cautioned the nature of a slowdown in inflation in February was unstable, with food inflation accelerating to 6.6 percent in February from 5.1 percent in December 2018.
     At the same time, economic growth has slowed this year, with the short-term indicator for January showing a 2.9 percent rise, down from 4.7 percent in 2018.
     But household consumption and consumer lending is improving and expected to continue to grow this year, supported by fiscal incentives, but the impact on inflation is not seen as high and doesn't require an immediate monetary policy response, the central bank said.
     Last month Kazakhstan's president, Nursultan Nazarbayev, accepted the resignation of NBK's chairman, Daniyar Akishev, and nominated cabinet minister Erbolat Dossaev, 48, as his replacement as part of a broader reshuffling of the cabinet.
     The change in NBK leadership follows Nazarbayev's call on the central bank and the government cabinet to boost economic growth to 5 percent this year from an estimated 4.1 percent in 2018.
     Kazakhstan's economy is in the midst of a major transformation that aims to reduce the footprint of the state and the economy's reliance of oil following the fall in oil prices in 2014, which hit growth sharply in 2015 and 2016.
     Akishev, who took over as NBK chairman in 2015, had focused on adopting a floating exchange rate after using a dollar peg for decades and introducing an inflation targeting regime.
     In the first 9 months of 2018 Kazakhstan's gross domestic product grew 4.2 percent and the International Monetary Fund has forecast average growth of 3.7 percent in 2018, down from 4.0 percent in 2017, and growth of 3.2 percent in 2019 and 2020.
     The exchange rate of the tenge, which often moves in synch with the Russian ruble, fell steadily last year but has stabilized in the last month.
     Today the tenge was trading at 376.6 to the U.S. dollar, down 0.2 percent this year.

     The National Bank of Kazakhstan released the following press release:

The National Bank of Kazakhstan has made a decision to maintain the base rate at 9.25% with the corridor of +/-1 percentage points. The annual inflation continued to decline in February and formed just below the midpoint of the target range. Nevertheless, the risk of accelerating inflationary background persists, in part because of the unbalanced dynamics of inflation components.

 The risks of the worsening external environment taken into account in the previous revision of the base rate did not realize. According to the assessment of the National Bank, the probability of their realization further on has diminished. The current level of the base rate facilitates the achievement of the target for inflation in 2019. 

In January and February 2019 annual inflation slowed down to 5.2% and 4.8% respectively. However, the nature of this decline is not stable. This is reflected in the multidirectional dynamic of the core components of the consumer price index. The inflation of food commodities accelerated noticeably (from 5.1% in December 2018 to 6.6% in February 2019) with regards to all categories of goods, except for the fruits and vegetables. A decline in the price of paid services in the first two months of the year (by 0.2% and 1.3% respectively) was due to the enhanced administrative measures to reduce tariffs for natural monopolies' services. This resulted in the reduction in the annual change of services’ component of the consumer price index from 4.5% to 1.3% from the beginning of the year. The inflation of nonfood products continued to slow down, reaching 6.2% in annual terms in February. 

The cost component has decelerated significantly. Prices in manufacturing slowed down to 7.7% in annual terms at the end of February (in comparison to 24.6% 6 months ago). The annual price growth in the manufacturing of consumer goods amounted to 1.8%. 

Inflation expectations are gradually reducing after a surge in Autumn 2018. In January, values of expected inflation 12 months ahead declined to 4.7%, which is the minimum value since the beginning of the questionnaire. The proportion of respondents that expect inflation acceleration fell to 17.2% in comparison to the historical maximum of 28.2% in October 2018, whereas the proportion of responders expecting a deceleration of inflation reached its maximum value in the past 12 months – 27.4%. 

The output gap is estimated to be positive, but its low level constrains the inflationary pressure. Moreover, the growth of economic activity has slowed down this year. The shortterm economic indicator amounted to 2.9% in annual terms in January 2019 (4.7% at the end of 2018). A positive contribution to the growth was provided by the mining industry (6.8%), transport (3.7%), trade (7.5%), and agriculture (3.5%). 

An increase in household consumption that was reinforced by the growing real money income (growth by 3.2% in December 2018 in annual terms) is observed, as well as a recovery in consumer lending (growth by 14% in annual terms in January). A strengthening tendency of consumer demand growth is expected due to the fiscal stimulus. Nevertheless, an impact on inflation is not estimated as strong. Therefore, it does not require an immediate reaction on the part of monetary policy.

Concerns related to the significant deterioration of the external environment, which were taken into account during the previous revision of the base rate in January this year did not materialize and a probability of risk realization has declined. Brent oil price is forming above $ 65 per barrel (in comparison to the price under $55 per barrel in the second half of December 2018). In January the FAO Food Price Index was 2.2% below the corresponding month last year, regardless of a rise in international price indices for dairy products and cereal.

Nevertheless, inflationary risks originating from several external factors continue to exist. The inflation in the countries - main trading partners reflects multidirectional tendencies. In January the annual inflation in Russia accelerated to 5.0%, whereas in China and the European Union it decelerated to 1.7% and 1.5% respectively.

Due to the decision made current monetary conditions remain neutral. Real market interest rates are kept at the level sufficient for achieving the target for inflation and, at the same time, facilitating the economic growth at potential levels. In the absence of shocks, the annual inflation will continue to form along the upper boundary of the target range of 4-6% in 2019.

The next decision on the base rate will be announced on April 15, 2019, at 17:00 Astana time."


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