Kazakhstan’s central bank kept its base rate steady at 9.25 percent but warned it may raise its rate in March if oil markets remain volatile amid improving domestic demand and upward pressure on import prices from Russia.
The National Bank of Kazakhstan (NBK), which raised its rate in October 2018, said it still expects inflation to remain within the upper range of its new and lower inflation target for 2019 in the absence of any significant shocks.
However, NBK said there was upward pressure on inflation from higher oil prices, a potential for inflationary pressure on domestic prices from imports from Russia, where inflation is estimated to rise further, and an expansion in domestic demand from fiscal incentives.
“Anchoring inflationary expectations around the current level and improving their resistance in the short term remains an important objective of the National Bank of Kazakhstan,” NBK said, underscoring that preventing inflation from exceeding its target remains a “high priority.”
Headline inflation in Kazakhstan, where oil accounts for around 60 percent of exports, was steady for the third month in a row in December at 5.3 percent but core inflation rose for the second month to 6.4 percent, above a 2018-low of 6.07 percent in August and 6.2 percent in December 2017.
The NBK has lowered its inflation target in recent years from 6.0-8.0 percent in 2016/17 to 5.0-7.0 percent in 2018 and 4.0-6.0 percent in 2019.
By the end of 2020 and following years NBK wants to lower inflation to close to 4.0 percent.
The NBK’s 25-basis points rate hike in October last year came after it kept the rate unchanged from June when it wrapped up a two-year easing campaign in which it lowered the rate by a total of 800 points.
NBK said current conditions still allow it to keep its monetary policy stance close to neutral, a level that maintains a balance between reaching its inflation target and keeping economic growth close to its potential level.
But there is considerable uncertainty regarding the future outlook, NBK said, and domestic demand is rising due to growing real income while consumer lending was still up 11 percent year-on-year in November 2018 despite slowing slightly.
Kazakhstan’s economy is in the midst of a major transformation that aims to reduce the footprint of the state and the economy’s reliance of oil following the fall in oil prices in 2014, which hit growth sharply in 2015 and 2016.
In the first 9 months of 2018 Kazakhstan’s gross domestic product grew 4.2 percent and the International Monetary Fund has forecast average growth of 3.7 percent in 2018, down from 4.0 percent in 2017, and growth of 3.2 percent in 2019 and 2020.
The exchange rate of the tenge, which often moves in synch with the Russian ruble, fell steadily last year and has continued to decline this year. Today the tenge was trading at 379.2 to the U.S. dollar, down 1.6 percent this year and down 12.2 percent since the start of 2018.
The National Bank of Kazakhstan released the following press release:
“The National Bank of Kazakhstan has made a decision to keep the base rate at 9.25% with the corridor of +/-1%.
The annual inflation continues forming at the levels corresponding to the target range. In December 2018, the inflation was at the level close to the lower boundary of the target range of 5-7%. In the condition of gradual recovery of economic activity, preventing inflation from exceeding the boundaries of the target corridor remains a high priority objective for the National Bank of Kazakhstan. In the absence of significant shocks, current level of the base rate will facilitate formation of inflation within a new target range of 4-6% by the end of 2019.
Further decisions on the base rate will be taken based on dynamics of actual inflation, its forecast values, and the degree of realization of risky scenarios. In case of maintaining of existing volatility in the key commodity markets that depresses the stability in the domestic financial market, a decision about tightening monetary policy might be taken on the next revision of the base rate.
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Annual inflation by the end of 2018 was formed at the level of 5.3%. A moderate increase of prices for all main categories of consumer goods and services was recorded. The largest price increase was fixed on non-food products (6.4% in annual terms). Prices of food products (increase of 5.1%) and paid services (increase of 4.5%) were formed at the level lower than the overall inflation.
At the same time, the core inflation in December was higher than the overall inflation and amounted to 6.7% (6.2% in December 2017), which indicates that the inflation background remains, associated both with the volatility of oil prices and the acceleration of domestic demand, which this year is being reinforced by fiscal incentives.
Nevertheless, at the end of 2019, the National Bank estimates inflation to maintain within the upper region of a new, lower target range of 4-6%, i.e. 5-6%.
Inflation expectations were reduced significantly. In November and December of 2018 values of expected inflation 12 months ahead resulted in 5.3% and 5.0% accordingly (after 6.4% and 6.3% in September and October). Anchoring inflationary expectations around current level and improving their resistance in the short term remains an important objective of the National Bank of Kazakhstan.
There is a volatility of oil prices observed in the external sector. After a decline in October-December last year down to the minimum values of the previous 1.5 years (US $50.47 per barrel), they went back to the level of US $60 per barrel in January 2019. Nevertheless, considerable uncertainty remains with regards to future outlook, which creates a potential ground for realization of the risky scenarios, both in the short and medium term.
In addition, strengthening of the external inflationary background is observed. An actual annual inflation in Russian Federation, the main trading partner, is forming above the target rate, while estimations about further acceleration this year create a potential foundation for inflationary pressure on domestic prices in Kazakhstan, taking into account high proportion of Russian imports.
In the domestic sector, the situation is expressed by the expanding domestic demand against the background of growing real income of population of 4.4% as of January-November period, in comparison to the corresponding period of the previous year. A growth of consumer lending was slowing down modestly and reached 11% in annual terms in November 2018.
Current development of macroeconomic indicators allows sustaining monetary conditions close to a neutral level. A neutral policy aims at maintaining a balance between achieving inflation targets and assisting in sustaining economic growth close to its potential levels.
Further decisions on the base rate will depend on the forecast dynamics of the domestic macroeconomic indicators and situation in the external markets. A necessity to achieve a target inflation of 4% by the end of 2020 becomes one of the key parameters. In case of maintaining volatility in the global oil market on the domestic financial market, a decision on the tightening monetary policy might be taken on the next revision of the base rate.
The next decision on the base rate will be announced on March 4, 2019, at 17:00 Astana time.”