In this op-ed Timur Turlov, СЕО of Freedom Holding Corp. shares his vision of why it is so important that the National Bank continues to take relevant actions in the future.
On Monday the National Bank of Kazakhstan raised the base rate from 13.50% to 14.00%. That is the sixth time the regulator has raised the rate over the past ten months. Last July the base rate was at 9.00%.
The regulator’s decision is based on standard assumptions. First, the inflation rate in Kazakhstan is still growing. In March, consumer prices soared by 12.0% while food inflation reached 15.0%. The quantitative evaluation of yearly inflation is at 11.4%. Second, the monetary policy the government of Kazakhstan sticks to is pushing inflation up. This year the public expenditures are going to rise by 24% while for over three years in a row this rate has grown by 17% on average. Many experts also believe that the business activity in the country is overheated as well. In the first quarter of 2022, the national GDP grew by 4.4%. The rate of credit provisions has also grown. Over the first three months of the year, this rate grew by 25%. However, the major part of this economic growth is driven by high commodity prices while investment activity declines.
The National Bank also noticed some inflation drivers in the external sector. FAO Food Price Index has hit historical records for more than 32 years. Moreover, this high rate is going to stay throughout the year and even longer. Oil prices are now at $90–100 per barrel and they won’t dip any time soon.
“The main risks for inflation in the near future might be linked to fiscal incentives along with positive dynamic of the economy; growth of domestic and external demand; surging prices for food, commodities and products on the global market; high inflation expectations; disruption of supply chains; and import of inflation from partnering countries,” said the National Bank.
Over the past two months, the regulator reached a tactical victory that improved the strategic outlook for Kazakhstan’s economy. This victory is the stabilization of the foreign currency market that in February-March was hit by the Russian invasion of Ukraine and the devaluation of the ruble.
In this situation, the National Bank of Kazakhstan continues to stick to the regime of the free-floating exchange rate. This is the most effective tool to mitigate external shocks. However, the excessive volatility of the exchange rate may undermine trust in the national currency. With help of the method of the Frankfurt auction, the regulator was able to diminish the speculative activity. In addition, the regulator requires that all quasi-sector entities convert at least 75% of their foreign currency revenues.
It simply would not be true to say that the only tools of the regulator were directives and limitations. The National Bank spent more than $1 billion during interventions in the foreign currency market. The bank sold U.S. dollars in cash to commercial banks in exchange for cashless foreign currency. Also, the regulator has expanded room for fluctuations between sell rate and buy rate from six to 15 tenge for transactions with dollars and from seven to 20 tenge for transactions with euro. When the National Bank saw that the speculative activity declined, it started to buy foreign currency back to replenish its reserves.
Another achievement is that the regulator succeeded in preserving a good yield curve even in spite of the growth of the percentage rate: long money is still cheaper than short money, which reflects the trust of market actors in the outlook for the national economy of Kazakhstan.
Amid these hard times, the National Bank is doing quite well in terms of the efficiency of its response.
It’s really important for the regulator to continue to stay proactive as it is now in the future
The inflation and business activity are going to decline: the increase in food prices increase has already declined in April. As the national currency is getting stronger, the imports’ impact on domestic production, which is looking for cheaper lending, will be increasing. The monetary policy of the country must take it into account far in advance because the effect of the base rate increase doesn’t arise instantly; this process takes some time. In other words, it would be better if the regulator decreases the base rate. I believe that the regulator has to take relevant actions before things worsen. So, I won’t be surprised if the National Bank decides to do so at the next meeting dedicated to the base rate.