Kazakhstan’s central bank kept its base rate at 9.25 percent, a level it said was neutral, helping ensure that inflation, which has declined in the last two months to the lower end of its current target range, will be within its new and lower target range of 4.0 to 6.0 percent in 2019.
The National Bank of Kazakhstan (NBK), which raised its rate by 25 basis points in October after cutting four times earlier in the year by 125 basis points, confirmed its forecasts for inflation to be close to the upper limit of its 2019 target range before smoothly declining in the first half of 2020.
Over the length of its forecast horizon to mid-2020, inflation is seen between 5.0 and 5.5 percent.
The NBK has lowered its 2019 inflation target range to 4.0-6.0 percent from the current range of 5.0-7.0 percent and in November and October inflation was steady at 5.3 percent, sharply below September’s 6.1 percent.
NBK said future decisions on the base rate would be based on the challenges of reaching a medium-term inflation target below 4.0 percent by the end of 2020, adding an important task in improving the effectiveness of its monetary policy is to improve the predictability of the target rate.
Despite the decline in inflation, NBK said overall inflationary pressures still remain quite high, reflected in a rise in October core inflation to 6.3 percent from 6.2 percent in September. Inflation expectations are also estimated to be above inflation though declining.
The main risks to inflation stem from uncertainty over oil prices, inflation among major trading partners and higher domestic demand that will be boosted by an expected rise in minimum wages.
Business activity is also continuing to grow while consumer lending was up 12.9 percent year-on-year in October, with loans for consumption up by 25.4 percent.
Kazakhstan’s tenge, which often reacts to changes in Russia’s ruble, has been relatively stable in the last month after falling sharply earlier this year, hit by worries over new U.S. sanctions on Russia and the general rise in the U.S. dollar.
The tenge was trading at 370.4 to the dollar today, down 10.1 percent this year.
Kazakhstan is in the midst of a major transformation of its economy that aims to reduce the footprint of the state after a tough economic environment following the decline in oil prices in 2014. Oil accounts for some 60 percent of the country’s exports.
The rise in oil prices has provided some breathing space to diversify the country’s economy, the International Monetary Fund (IMF) said last week, adding the challenges include continuing the development of an inflation-targeting framework, moving decisively past long-standing weakness among Kazakhstan’s banks, scaling back fiscal support while boosting non-oil revenue, addressing fiscal risks and fostering the emergence of new sources of private sector growth.
The IMF said Kazakhstan’s economy grew 4.2 percent in the first half of this year, led by manufacturing, oil and a recovery of credit growth, and forecast average gross domestic product growth this year of 3.7 percent, down from 4.0 percent in 2017, and 3.2 percent in 2019 and 2020.
The rise in exports, especially oil, has supported an improvement in the current account and in the medium term the IMF projects a pickup of non-oil growth to 4 percent.
The current account deficit is seen narrowing to 0.7 percent of GDP this year from 3.4 percent in 2017 and then further to a deficit of 0.3 percent in 2019 and 0.4 percent in 2020.
Consumer price inflation is seen averaging 6.2 percent this year, down from 7.1 percent last year, then 5.5 percent in 2019 and 4.4 percent in 2020.
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