Monday, January 15, 2018

Kazakhstan cuts rate 50 bps, open about further cuts

       Kazakhstan's central bank lowered its base rate by 50 basis points to 9.75 percent, saying this was  "based on the lower level of the actual inflation rate by the end of 2017 in contrast to the forecasted trajectory, the estimates of further deceleration of the inflationary processes, the continuing weak recovery of the domestic demand, and also the favorable trends in the external markets."
       The National Bank of Kazakhstan (NBK) cut its rate by 175 basis points last year but has maintained the rate steady since August. The NBK has now cut the rate by 725 points since embarking on an easing cycle in May 2016.
        The NBK left open the possibility of further rate cuts, saying this would depend on global financial markets, a stabilization of the positive trends in the domestic economy and inflation.
        The central bank said monetary conditions remain neutral in light of an expected deceleration of inflation, with the current rage ensuring that inflation will ease to the bank's target of 5-7 percent, equal to Kazakhstan's long-term potential growth rate.
         In its monetary policy guidelines from December the NBK lowered its inflation target for 2018 to 5-7 percent from 6-8 percent. By end-2019 the NBK targets inflation of 4-6 percent and then by end-2020 inflation of below but close to 4.0 percent.
        Kazakhstan's inflation rate eased to 7.1 percent in December, below the expected 7.5-7.7 percent, from 7.3 percent in November and 7.7 percent in October. The decline was helped by low volatility of the exchange rate of the tenge along with a decline in petrol prices and slower growth in durable goods.
        Disinflationary tendencies are expected to persist until the end of this year and next year although inflation could rise in the first quarter of this year due to changes in some tariffs.
       However, the central bank said this would not require "corrective measures to tighten the monetary policy" as these changes from the supply side, which doesn't react to NBK's policy.
       Oil-exporting Kazakhstan, which stretches from the Caspian Sea to Mongolia, has a recent history of currency volatility and 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.
       After sliding from May through October 2017, the tenge has risen in the last two months, 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.

       Today the tenge was trading at 328.9 to the U.S. dollar, up 1.2 percent this year and up 2.4 percent since the start of 2017.

      The National Bank of Kazakhstan issued the following statement:

"The National Bank of Kazakhstan has decided to reduce the base rate to the level of 9.75% with a corridor of +/-1%. The decision on the reduction was based on the lower level of the actual inflation rate by the end of 2017 in contrast to the forecasted trajectory, the estimates of the further deceleration of the inflationary processes, the continuing weak recovery of the domestic demand, and also the favorable trends in the external markets.

The trend of the further easing of the monetary policy conditions will depend on the situation in the world markets and in the countries - main trade partners, stabilization of the positive trends in the domestic economy, which will determine the accordance of the forecasted inflation with that of the actual.

The annual inflation in December 2017 has amounted to 7.1%, which is significantly lower than the expected level of 7.5-7.7%. The deceleration of the inflation rate was caused by the stabilization of the price dynamics in the markets of some goods and services, specifically in the nonfood product markets. In December 2017 the petrol price has decreased after the growth in the autumn months. In relation to the low consumer demand, the slower growth of the durable goods prices is being observed. The price growth of the food products and services reflects the historical dynamics and in general matches the forecasts. The low volatility of the tenge exchange rate has also made a positive contribution to the deceleration of the annual inflation.

It is expected that in the medium-term (until the end of the current year and in the next year) disinflationary tendencies will persist. However in the short-run period (in the first quarter of 2018) the tariffs for paid services of the monopoly enterprises will become an existing risk for the annual inflation rate to sustain on the same level or even to increase to some extent. Though, their influence on the inflation is estimated as limited and does not require the corrective measures to tighten the monetary policy conditions since the risks of inflation may be released on the supply side, which does not depend on the NBK’s policy.

The households’ perception of the prices is getting better. In 2017 according to the surveys of the households, the share of responders, which believed that the prices have been increasing more rapid than earlier in the last 12 months, has decreased from 59.8% in December 2016 to 52.1% in December 2017. The quantitative assessment of the inflationary expectations of the households for a year ahead has decreased from 7.6% in December 2016 to 7.1% in December 2017.

Regarding the demand, the growth deceleration of the costs on the final consumption is being observed. It is stipulated by the decrease of the households’ income in the real terms, which also limits the consumer price growth.

The external conditions are favorable. Since the end of October the oil prices get steadily formed on the level above 60 US dollars per barrel. Continuation of the OPEC+ agreement about the oil production cuts while keeping the current quota in November 2017 reduces the risks of the significant oil price drop. Also, the world food prices index in December has declined in comparison to the previous month by 3.3%, and the expectations of the world output growth in some agriculture markets in 2018 ensures maintaining the current level of prices. The improvement of the economic situation and the moderate rate of inflation in the countries – main trade partners, which all together with the other factors will make a disinflationary impact on the consumer prices in Kazakhstan.

In spite of the base rate reduction, the monetary policy conditions remain neutral in a context of the expected deceleration of the inflation rate. The current level of the base rate in the real terms ensures maintaining the target level of the inflation in 2018 (5-7%) and corresponds to the long-term potential level of the economic growth.

The next decision on the base rate will be announced on March 5, 2018 at 17:00 Astana time."


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