Tuesday, March 29, 2016

Kyrgyzstan cuts rate 200 bps but sees inflation pressures

    The central bank of Kyrgyzstan cut its benchmark discount rate by 200 basis points to 8.0 percent to help stimulate the economy in light of the low level of general inflation and the decline in economic activity.
     It is the first change in rates by the National Bank of the Kyrgyz Republic (NBKR) since September 2015, when the rate was raised by 200 basis points, but the central bank said there are still medium-term inflationary pressures despite the current trend toward a reduction in overall prices.
    The rate cut comes after the central bank in February said it intended to maintain rates in the coming period but would take appropriate measures depending on the economic situation. Last year the NBKR cut its rate by a net 50 points after both increases and decreases.
     The inflation rate in Kyrgyzstan declined to 1.3 percent in February from 1.8 percent in January and eased further to 0.8 percent as of March 18, the central bank said, adding it expects a "moderate increase in prices for 2016," close to its target of 5 -7 percent by the end of the year.
    Kyrgyzstan's Gross Domestic Product declined by 7.8 percent in the January-February period, the central bank said, attributing this to reduced output from the Kumtor gold mine.
    Excluding Kumtor, GDP fell by 0.1 precent in first two months of this year as economic activity continues to the impacted by low growth in the country's trading partners.
    The low price of oil and the slowdown in Russia, Kazakhstan and China will exert pressure on the economy through fewer remittances and reduced trade.
    In 2015 Kyrgyzstan's economy expanded by 3.5 percent and in December the International Monetary Fund forecast growth this year of 3.6 percent.
    After falling sharply in 2014 and 2015, the exchange rate of the Kyrgyzstani som has appreciated since mid-February. The som was trading at 70.85 to the U.S. dollar today, down lows of 75.9 at the start of this year and through mid-February for an appreciation of 7.1 percent.
    Last month the IMF noted the NBKR had been successful in steering the foreign exchange market through a "particularly turbulent period," but going forward interventions in the foreign exchange market should be limited to smoothing excessive volatility to avoid depleting reserves and eroding competitiveness.
    The IMF in December estimated that Kyrgyzstan's gross international reserves would decline to US$1.770 billion in 2016 from $1.856 billion in 2014 and then further to $1.586 billion in 2016 before rising to $1.776 billion in 2017.
    The IMF also forecast that inflation would average 8.9 percent in 2016 and then 6.9 percent in 2017 compared with 7.4 percent in 2015.
    In 2015 the som lost 22.4 percent of its value against the U.S. dollar and the IMF cautioned that the process of de-dollarizing the economy is a long-term process that requires policies to strengthen the financial sector and the current program of converting foreign currency mortgages should not be extended.




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