National Bank holds its ground on base rate issue

According to National Bank Chair Timur Suleimenov, the regulator does not plan to cut the base rate to avoid potential negative consequences. He made this statement in response to an MP inquiry.

Once again, Suleimenov reiterated that the high base rate — currently at 15.25% — is necessary to curb inflation, which reached 8.9% in January. The price increase was even higher at 13.2%, while inflation is expected to surge to 14.6% within a year.

«In this situation, cutting the base rate may have serious consequences. If the rate is lower than inflation and public, business and financial sector expectations, deposits in tenge — currently estimated at $64.4 billion (out of a total deposit portfolio of $83 billion) — would shrink dramatically. This would happen because lower interest rates would make these deposits less attractive,» Suleimenov said.

The official also warned that if this occurs, people may start purchasing durable goods and apartments in anticipation of further price increases. Additionally, they may shift to cash and foreign currencies, losing confidence in the tenge.

«No doubt, a surge in money flowing into the real estate market will drive up prices, erasing all the government’s efforts to make housing more affordable and undermining public housing programs,» the National Bank chair underlined.

Suleimenov noted that rising consumer demand would also boost imports, putting additional pressure on the tenge.

«A weakening exchange rate and an increase in foreign currency deposits would reverse the long-term trend of de-dollarization and could trigger a foreign exchange crisis. The rate of deposit dollarization may even reach new historic highs (70% in January 2016),» he said.

He emphasized that rising inflation and a weakening tenge would hurt ordinary citizens the most — especially those without savings or those living paycheck to paycheck. Businesses would also face significant challenges.

«A decline in tenge deposits, which are a vital funding source for commercial banks, would drive up loan interest rates, resulting in the opposite of what we want,» Suleimenov said.

He also dismissed arguments that a high base rate makes loans unaffordable for businesses. He pointed out that in November 2024, the volume of corporate loans grew by 20.6%, reaching $37.8 billion.

«If we cut the base rate, that does not automatically mean an increase in investment. Businesses invest when there is market stability, favorable macroeconomic conditions and strong demand — not just because of cheap loans,» he explained.

Over the past 10 years, he added, businesses have primarily relied on their funds for fixed capital investments — 60% to 70% — while only 3% to 7% came from borrowed money.

«Let’s not forget that between 2018 and 2021, when the base rate averaged 9.3%, the share of bank loans in investments was 3.7%. After the COVID-19 pandemic, from 2022 to 2024, the average base rate rose to 15%, yet the share of loans in investments remained nearly unchanged at 3.6%. This proves that loan affordability is not the key factor driving fixed capital investment,» Suleimenov said.

In 2023, large and medium-sized enterprises reported $29.7 billion in revenue, while in the first nine months of 2024, this figure reached $22.3 billion. Suleimenov believes these numbers prove that companies already have the resources for investment.

The National Bank chair stressed that inflation would be much higher without a high base rate.

«Given the current massive fiscal stimulus (record-high $12.6 billion withdrawals from the National Fund), a 19.2% year-on-year increase in money supply in December 2024 (reaching $91.9 billion), ongoing tariff reforms and other inflationary pressures, the base rate is a crucial tool keeping inflation in check. Moreover, our econometric models show that without a strict but balanced monetary policy, inflation would have been much higher,» he concluded.

As the interest rate at which a central bank lends to commercial banks, the base rate plays a critical role in the economy. By raising it, central banks increase borrowing costs for banks, which then raise interest rates on loans and deposits for businesses and individuals.

Higher deposit rates encourage savings over spending, reducing demand for goods and services and slowing price increases. Meanwhile, expensive loans discourage borrowing, further limiting excessive spending and inflationary pressures. The National Bank of Kazakhstan is set to announce its next base rate decision on March 7.