National Bank of Kazakhstan raises base rate


The National Bank decided to raise the base rate at the level of 16% per annum with an interest corridor of +/1.0 percentage points. As a result, the rate on standing access operations to provide liquidity will be at 17%, and on standing access operations to withdraw liquidity at 15%.

As noted by the regulator, this decision was made due to increased inflationary pressure. The effect of the increase in the base rate will manifest itself with a lag of one or two years, supporting the savings activity of economic entities and contributing to the balance in the domestic foreign exchange market.

"The excess of inflation over forecasts in September became quite significant. The key factors behind the decision were high inflation expectations, strong demand, fiscal momentum, rising production costs due to the reorientation to more sustainable supply chains, the continued transfer of external inflation, including as a result of continuing strong Russian rouble exchange rate. Increased inflationary expectations are putting pressure on prices and consumer behaviour. All this requires tighter monetary conditions to maintain control over inflationary processes in 2023," the regulator explained.

In September 2022, annual inflation was 17.7%. But despite its slowdown in July, consumer price growth has accelerated markedly in recent months.

"The annualised figure in September was 26.8% (in July 2022 17.7%). Core inflation is forming at elevated levels, reaching 19.7% in annual terms. This indicates the risk of a protracted high inflation background in the economy," said the National Bank.

In addition, inflationary expectations of the population and professional macroeconomists have grown significantly. The median estimate of expected inflation by the population for the year ahead increased to 16.9% in September 2022. Households' estimates of future price increases are mainly driven by expected changes in food prices, external events and changes in the exchange rate. The growth of inflationary expectations takes place against the backdrop of a migration shock, which is of a short-term nature. However, this created spill-over risks due to its direct impact on inflation expectations.

Also in September 2022, there is a significant increase in inflation expected by professional macroeconomists to 18.5% in 2022 and 11% in 2023 (from 15.1% and 8.8%, respectively, according to the results of the previous survey in August 2022).

"Stronger fiscal stimulus is a significant source of pro-inflationary pressure in the economy. This is expressed through the impact of fiscal policy on the growth of the money supply (M3), which has grown by 7.9% or 2.4 trillion tenge since the beginning of the year. In 2022, public spending budget are formed significantly higher than the values of the previous year. Growth for the nine months of 2022 amounted to 18.9% in annual terms. The outstripping growth of budget expenditures in the current year requires a compensating reaction from the National Bank's monetary policy," the report says.

Consumer demand maintains a positive trend against the backdrop of growing inflationary processes. The volume of nominal retail trade turnover in the first nine months of 2022 increased by 15.7% compared to the previous year. Additional pro-inflationary pressure from the demand side is created by an increase in consumer lending to individuals (by 21.4% in January-September 2022 compared to the same period in 2021).

Also, environmental factors are characterized by a high degree of uncertainty. Prices in world food markets continue to decline, as evidenced by the FAO index. In September 2022, the indicator decreased by 1.1% (in annual terms an increase of 5.5%). At the same time, there is an increase in wheat prices associated with the risks of exporting grain from Ukrainian Black Sea ports and weather conditions in Argentina and the United States.

"Consumer inflation in many countries continues to accelerate. In the EU in September 2022, inflation was 10.9%. In particular, in Germany, inflation accelerated from 8.8% to 10.9%. In the United States, inflation, despite the more aggressive policy of the US Federal Reserve, remained almost at the same level. Under these conditions, the monetary policy of most central banks continues to tighten, making the achievement of the inflation target a priority. Thus, since the beginning of this year, the US Federal Reserve has consistently increased the interest rate from 0.25% to 3.25%," explained the message.

The prospects for further development of the global economy were again worsened, the National Bank reminded. The IMF forecasts for global economic growth in 2022 remained unchanged at 3.2%. Estimates for 2023 have been reduced from 2.9% to 2.7%. High geopolitical risks, increased inflationary pressure, and a slowdown in economic activity in China remain the main constraining factors for global economic growth.

In the world oil market, there are also multidirectional factors affecting prices. In the last month, Brent oil prices fluctuate at $82-$96 per barrel. Prices declined on the back of deteriorating demand forecasts, as well as rising inventories in the US. The growth of prices was supported by interruptions in supplies from Russia and some countries of the Middle East. Prices are also supported by a reduction in the total oil production quota by OPEC+ members by 2 million barrels per day from November 2022. According to EIA forecasts, the price of Brent will average $93 per barrel in the fourth quarter of 2022 and $95 per barrel in 2023.

"An important condition for subsequent decisions will be the compliance of actual inflation with the forecast trajectory, the dynamics of inflationary expectations of economic entities, as well as the balance of the above risks in the external and internal environment. Considering the current situation, the potential for raising the base rate at the next meetings remains, and the National Bank intends to continue tightening monetary conditions, based on the state of pro-inflationary risks," the message concludes.

By Meruert Kenesova for LS (Kazakhstan).