National Bank of Kazakhstan keeps the base rate the same

The decision is based on the current balance of risk of inflation and the regulator’s recent forecasts

On June 6, the National Bank of Kazakhstan took a decision not to change the base rate of 14% with a percentage corridor of +/– 1 p.p. The standing lending facility rate is also the same at 15% while the standing facility rate for liquidity withdrawal is 13%, according to the regulator.

The decision is based on the current balance of inflation risks in the short- and middle-term as well as updated forecasts by the National Bank. “This level of the base rate is going to help the inflation rate slow smoothly by 2024. Monetary factors will get back to normal as long as the inflation process will slow down next year,” the regulator said.

In May 2022, the growth of annual inflation continued accelerating; the inflation rate was at 14%. At the same time, the National Bank reported an increase in almost all elements of the consumer price index. The key driver of the annual inflation is the food price surge. Amid supply chain disruption and high demand, prices for imported goods and products have soared. However, a freeze on utilities and fuel prices allows the government, at least so far, to put a bridle on inflation.

“Even though the monthly inflation dropped in May to 1.4% (the rate was 2% in April) it is still too high, higher than the historical average. The reason the monthly inflation is so reluctant to decline is linked to high domestic demand, positive fiscal momentum and high inflation expectations,” the National Bank.

The regulator noted that quantifiable inflation expectations for years to come were 11.7% in May. Many respondents who expect the high rate of inflation associate this with a food price surge. In general, the level of inflation perception is quite high.

Despite the geopolitical situation and breakdown of the CPC pipeline, Kazakhstan’s economy has grown, according to the National Bank. Over the period from January to April, the GDP grew by 4.4%. Moreover, once quarantine restrictions were lifted and global commodity prices are at their high, almost all sectors of Kazakhstan’s economy have shown steady growth.

Consumer demand has also demonstrated a positive dynamic. In April, retail turnover in commodities rebounded to the pre-January level (before the riot of January 5). For example, turnover in food products shows growth while in January it was in decline. The rebounding in the non-food sector is driven by high rates of consumer lending.

Also, the regulator reported an increase in investments the market actors put into the housing sector in the first quarter of this year. The opportunity to use part of retirement money to improve living conditions was another driver in this sector. All of this makes the property prices continue to grow.

According to an updated forecast by the National Bank, this year Kazakhstan’s economy may be grown by 2.8%-3.8%. These expectations are based on the current growth that has been projected to the end of the year. However, the geopolitical crisis over Ukraine, weak global demand and deep transformation in supply chains may prevent the economy from fast growth. The main risk for Kazakhstan is the potential cut-off of the country from the global market due to rising geopolitical tensions. If this worst-case scenario is realized, it may seriously slow the growth of the GDP in the country.

The positive scenario implies the GDP will grow by 3.5%-4.5% in 2023. This growth may be driven by improving export and import supply chains, less uncertainty in the global economy and more oil output if compared to the current year when the oil production is limited by the OPEC+ deal. The stable domestic demand will also be a significant factor in that growth. In 2024, Kazakhstan’s economy is expected to grow at the expense of new oil and gas projects, bigger oil output and fading global shocks.

According to the National Bank, by the end of 2022, the inflation rate is expected at 13-15% and at 7.5-9.5% in 2023. If there are no new external or internal shocks in 2024, the inflation rate is expected to slow, although out of the targeted corridor.

Among key inflation risks for Kazakhstan are geopolitical uncertainty, risk of capital outflow, risk of inflation import (from Russia) and risk of weak supply or high inflation expectations. Another risk is an increase in public spending, if the already-approved state budget is changed.

The regulator is going to make any decisions concerning the base rate according to the situation with a factual dynamic of inflation and balance between foreign and domestic economic risks. The Monetary Policy Committee under the National Bank will reconsider the base rate again on July 25, 2022.

According to a review by the Association of Financiers of Kazakhstan conducted in early June before the committee meeting, the vast majority of financial experts (64%) expected that the regulator would not change the base rate. However, 14% of respondents expected the rate to decrease and 22% had thought the opposite.

On February 24, the base rate was raised from 10.25% (first set in January 2021) to 13.5% with a percentage corridor of +/-1 p.p. At the time the regulator was aimed at supporting prices because the government of the Republic of Kazakhstan and the National Bank were trying to be prepared for the geopolitical situation to deteriorate even further. The higher base rate was part of the worst-case scenario and the anti-crisis action plan.

On March 9, the National Bank decided not to change the base rate and kept it at 13.5%. On February 24, the rate was increased from 10.25% to 13.5% with a percentage corridor of +/– 1 p.p. At that time, this decision was driven by the idea to stabilize prices amid rising geopolitical tensions as the regulator had prepared itself for this worst-case scenario.

The regulator has been gradually decreasing the base rate since July 2016 (15%). In February 2020, the base rate was decreased to 9.25%. In March 12% it was increased to 12% and plummeted to 9.5% in April that year. In July 2021, the rate was increased to 9.25%; in September to 9.5% and 9.75% in October. In January 2022, the base rate in Kazakhstan was increased to 10.25%.

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