Kazakhstani financiers predict base rate to be cut in July

The Association of Financiers of Kazakhstan (AFK) believes that the slowdown of both annual and monthly inflation is likely to lead to the lowering of the base rate in July.

According to the Bureau of National Statistics, inflation was 0.5% in June compared to 0.6% in May, which was the lowest rate over the past 18 months. Inflation dropped from 15.9% in May to 14.6% in June year on year.

«As a result, the effective rate (inflation excluded) in the economy was expanded to 2.15%, which makes it highly possible to cut the base rate at the next meeting on monetary policy of the country on July 5,» the AFK said in a statement.

Galymzhan Pirmatov, head of the National Bank has indirectly confirmed this idea as he said that the regulator can cut the rate in the second half of the current year, although it is going to do so smoothly and carefully.

«What we actually decide will largely depend on the correlation between the actual price growth and forecast estimates and whether the slowing of base inflation is sustainable as fuel and utility prices continue to go up and the dynamic of inflation expectation is quite high. Moreover, whether the government will comply with the fiscal rule in budgeting for 2024–2025 will also play a big role,» Pirmatov said.

On July 2, the tenge’s exchange rate was 449.26 per one US dollar while the trading activity was quite low in terms of trading amount ($59.9 million). During previous surveys by the AFK, many experts expected the tenge’s exchange rate to be 453.2 tenge per dollar in July 2023 and 472.6 tenge per dollar in 2024.

The AFC believes that the tenge has strengthened thanks to growing oil prices and the risk appetite of global investors, while expectations of a recession are fading. Increased demand for the Kazakh currency could also be associated with profit-taking by market participants, while additional supply is still provided by the conversion of transfers from the National Fund and the mandatory sale of foreign exchange earnings by the quasi-public sector.

The AFC expects that stock markets in the U.S. will continue to show a positive dynamic. Investors hope that the US Federal Reserve can make inflation slow down without «killing» the economy. In this regard, the tightening of monetary policy isn’t necessarily considered by the market as a move toward recession.

“Data from the U.S. market, including manufacturing PMI, new jobs and jobless claims reports by ADP, services PMI and the full report on employment will have a huge impact on investors’ mood this week,” the AFC said.

In early June, the AFC conducted a survey among players in the Kazakhstani market and found that most of them expect the base rate to be reduced from the current 16.75% to 16.5% in July and further to 13.5% by June 2024 due to slower inflation. In 2023, the National Bank expects inflation of about 11% to 14% compared to 20.3% inflation last year.

On May 26, 2023, the National Bank kept the base rate at 16.75% with an interest rate corridor of +/- 1 percentage point. Experts predicted that this rate would remain the same further. Earlier, the regulator said it would leave the rate at the same level until July. In 2022, the National Bank raised the base rate on six occasions: from 10.25% to 16.75%. This year, the regulator reviewed the rate three times leaving it at 16.75%.