The National Bank of the Republic of Kazakhstan (NBK) left its base rate at 9.0 percent, unchanged since July when it lowered it for the second time this year after a cut in April.
Although NBK cut the rate by a total of 300 basis points in April and July, the net change for the year only amounts to 25 basis points as it raised the rate by 275 basis points in March in an emergency move to protect the exchange rate of the tenge that came under pressure from a collapse in the prices of oil, the country's main export.
The National Bank of the Republic of Kazakhstan released the following statement:
"The National Bank of the Republic of Kazakhstan decided to keep the base rate at the level of 9.0% per annum while maintaining the interest rate corridor +/– 1.5 percentage points. Accordingly, the rate on standing access operations to provide liquidity will be 10.50% and on standing access operations to withdraw liquidity - 7.50%.
The recovery in global economic activity is moderate and volatile amid the second wave of COVID-19. As a result of a new surge in the incidence in the world, a record number of infected are registered, forcing governments to introduce new restrictions in many countries, including Kazakhstan's largest trading partners - the EU countries and the Russian Federation. The oil market is experiencing increased volatility due to uncertainty about the recovery in global demand. Geopolitical risks are growing. The persistence of uncertainty and the increased likelihood of external risks materializing limit the potential for lowering the base rate.
For the second month in a row, inflation has stabilized. Disinflationary factors continue to prevail and are reflected in subdued aggregate demand, declining real incomes of the population and a slow recovery in business activity. There are also pro-inflationary factors in the short and medium term. Medium-term includes a possible acceleration of inflation due to deferred demand, an expected deterioration in the current account of the balance of payments and a deferred consolidation of the state budget. Short-term factors include a worsening epizootic situation (mass mortality of poultry as a result of the spread of bird flu), an increase in gasoline prices due to a slowdown in production growth, increased exports, an increase in electricity tariffs and an accelerated rise in sugar prices in the Russian Federation.
At the end of September 2020, annual inflation is below the National Bank's expectations at 7.0% (in August 7.0%). The food and non-food components of inflation have stabilized, amounting to 10.8% (10.9% in August) and 5.5% (5.5% in August), respectively. The inflation of paid services was formed at the level of 3.6%. The National Bank monitors the dynamics of inflation components. In the structure of food inflation, there was a slowdown in annual growth rates of prices in the markets of meat and bakery products. There is an increase in prices for groups of goods with a significant import component. The annual growth in prices for bakery products and cereals amounted to 13.4%, meat and meat products - 10.3%, oils and fats - 9.8%, tea and coffee - 9.4%, alcoholic beverages - 7.7%. The dynamics of non-food inflation remains relatively stable against the backdrop of suppressed consumer demand caused by the fall in real money incomes of the population, as well as compliance with quarantine measures and restrictions on the operation of retail facilities. As quarantine measures are softened and the activities of enterprises in the real sector are resumed in September 2020, the annual growth rate of gasoline prices accelerates to 2.7%. The main factor behind the acceleration of inflation of paid services was the rise in the cost of regulated utilities by 0.7%, in particular, by 6.6% for electricity. The overall rise in prices for services is also facilitated by the rise in the cost of education and communication services by 3.3% and 2.1%, respectively. As quarantine measures are softened and the activities of enterprises in the real sector are resumed in September 2020, the annual growth rate of gasoline prices accelerates to 2.7%. The main factor behind the acceleration of inflation of paid services was the rise in the cost of regulated utilities by 0.7%, in particular, by 6.6% for electricity. The overall rise in prices for services is also facilitated by the rise in the cost of education and communication services by 3.3% and 2.1%, respectively. As quarantine measures are softened and the activities of enterprises in the real sector are resumed in September 2020, the annual growth rate of gasoline prices accelerates to 2.7%. The main factor behind the acceleration of inflation of paid services was the rise in the cost of regulated utilities by 0.7%, in particular, by 6.6% for electricity. The overall rise in prices for services is also facilitated by the rise in the cost of education and communication services by 3.3% and 2.1%, respectively.
Inflation expectations fell in September 2020. Compared to the previous assessment, fewer respondents noted an increase in food prices, more - for non-food products and services. In September 2020, the quantitative estimate of inflation for the year ahead was 6.5%. The share of respondents expecting the current or faster price growth to persist over the next 12 months fell to 49% in September 2020 (55% in August 2020). Despite the positive changes, respondents' assessments remain largely volatile.
Core inflation indicators have stabilized. Core inflation (excluding fruits and vegetables, utilities (regulated), rail transport, communications, gasoline, diesel and coal) was 7.4% in September (7.4% in August), the deviation from actual inflation fell to 0. 4 pp (in December 2019 - a gap of 1.9 p.p.). Core inflation is trimmed mean (total inflation excluding 8% of maximum and minimum price changes) and median inflation in September 2020 demonstrates more moderate dynamics - 6.1% (6.2% in August) and 4.6% (4, 5% in August), respectively.
Since the beginning of the year, the real sector has been showing the expected decline, while the recovery continues. At the end of 9 months of 2020, GDP contracted in accordance with forecasts by 2.8%. The negative impact of the COVID-19 pandemic on the economy of Kazakhstan remains, however, improvements are observed in certain sectors due to the relaxation of quarantine measures and state support. In September, a positive contribution was made by the manufacturing industry (2.9%), agriculture (5.1%), construction (24.2%), information and communications (7.3%). In trade, for the first time since March, an increase of 2.7% was recorded. The main negative contribution to the GDP dynamics was made by the mining industry (-7.7%) and transport (-23.1%). The results of the survey of enterprises indicate a slight improvement in sentiment in the real sector. In September 2020, the business activity index (PMI) rose by 2.2 points and amounted to 47.6 (July - 44.7, August - 45.4). At the same time, the IDA level remains below 50 points, which still speaks of suppressed economic activity and the prevalence of disinflationary factors. After six months of being in the negative zone, the business climate index turned into positive in September, amounting to 2.0 points.
Fixed investment declined 4.9% in January-September 2020, reflecting the impact of the shock caused by the coronavirus pandemic. The recovery of investment activity is taking place in transport and professional, scientific and technical activities (since the beginning of the year, growth by 5.7% and 57.1% yoy, respectively). The negative dynamics of investments persists in the mining industry, where the decline in January-September deepened compared to the previous months (a 23% decline, yoy in January-September 2020). A decline in investment is also noted in trade, construction and financial activities. All other sectors of the real and public sectors show an increase in investments in fixed assets.
Real money incomes of the population continued to decline in August 2020, while the growth of real wages slowed down. The annual decline in real cash income was 2.5%. In January-August 2020, in the structure of nominal incomes of the population, there was a decrease in the share of income from self-employment and an increase in the share of income from employment and income in the form of transfers. This is accompanied by the continued growth of expenditures of the republican budget for social assistance and social security (in January-August 2020, an increase of 17.6%). In August, the growth in real wages (excluding small businesses) amounted to 3.5%, in September - 3.0%.
The external sector remains uncertain about the speed of the global economic recovery. In October, the IMF improved its forecast for the development of the world economy for 2020 from -4.9% to -4.4%, but adjusted its expectations for 2021 downward from 5.4% to 5.2%. Uncertainty about the pace of global economic recovery due to the situation with the coronavirus remains. At the same time, the results of the presidential elections in the United States and the size of the stimulus package from the United States remain one of the significant risk factors for foreign markets.
The IMF estimates on the growth of the economies of the countries - the main trading partners at the end of 2020 have improved. For the EU economy, the forecast for 2020 has been improved from -10.2% to -8.3%. For 2021 it has been reduced from 6.0% to 5.2%. The outlook for recovery stems from uncertainty amid an increase in the number of people infected with coronavirus, as well as a lack of agreement with the UK on future trade relations. The forecast for the Chinese economy in 2020 has been improved to 1.9% (the previous estimate was 1.0%). In 2021, the estimate has not changed - 8.2%. Despite the expected recovery, concerns remain about the spread of the coronavirus in many key cities and a slower recovery from past floods. In addition, the drop in imports in July-August 2020 indicates weak domestic consumption. The forecast for the dynamics of the Russian economy for 2020 has also been improved from -6.6% to -4.1%, while for 2021 it has significantly deteriorated from 4.1% to 2.8%. The deterioration is associated with an increase in the mineral extraction tax, increased sanctions and geopolitical risks and risks associated with the instability of the global oil market.
Monetary conditions in trading partner countries remain soft amid declining business activity around the world. Inflation in trading partner countries remains below target. Against the background of weakening demand, inflation in September 2020 in the EU (0.2%) and China (1.7%) continued to decline. In Russia, inflation accelerated to 3.7% in September against the background of rising prices for non-food products.
The situation on the world oil market is developing under the baseline scenario of $ 40 per barrel. In September 2020, prices for Brent crude oil fell below $ 40 per barrel with a subsequent recovery, which was associated with repeated outbreaks of coronavirus in the world, as well as an increase in oil supply in world markets. According to international organizations, oil demand will continue to recover until the end of 2020 and in 2021. Supply growth will be moderate and will be provided mainly by non-OPEC countries. At the same time, the main risks in the oil market remain: uncertainty about the COVID-19 pandemic, the recovery of oil production in Libya and the United States, low discipline among the OPEC + countries.
At the end of 9 months of 2020, the current account of the balance of payments is expected to move into the negative zone. Deteriorating terms of trade in March-April due to lower oil prices and oil production volumes will affect the balance of payments indicators in the third quarter. The negative current account of the balance of payments will be due to the first trade deficit in the last 20 years, caused by the outstripping rate of decline in exports over imports.
The next decision on the base rate will be made based on the results of the upcoming forecast round "November-December" and will be based on updated forecasts for inflation and other macroeconomic indicators, depending on the evolving dynamics and the continuation of the coronavirus pandemic, which will allow analyzing the compliance of monetary conditions with the expected and actual situation. in the economy, as well as to assess the potential space for rate cuts, given the achievement of the inflation target in 2021.
The next planned decision of the National Bank of the Republic of Kazakhstan at the base rate will be announced on December 14, 2020 at 15:00 Nur-Sultan time."
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