The National Bank of the Republic of Kazakhstan resolved to raise the base rate to 9.25% per annum, according to the press service of the NBK. According to the National Bank, actual inflation is above expectations and reached 5.5% in August. The inflationary pressure caused by the expansion of consumer demand increased compared to the previous forecast, which pushes inflation to the upper range of the target corridor at the level of 5.7% -5.8% by the end of 2019. On the forecast medium-term horizon in 2020, inflation is expected within the target corridor of 4-6% with some slowdown. Economic growth for 7 months of 2019 was higher than the National Bank’s forecast at 4.2%, which creates inflationary pressure in the economy.
"In order to achieve the stated inflation targets, the National Bank will make further decisions on the base rate taking into account the prevailing and predicted inflation dynamics relative to the target corridor, risks from domestic demand, import growth and the situation in the world economy," the statement says.
It is noted that annual inflation in August 2019 amounted to 5.5%. At the same time, the main contribution to inflation continues to be made by foods, the annual price growth of which made 9% (5.1% in December 2018). Amid rising external demand and lower domestic supply, prices for meat, bakery products and cereals upped. The annual price increase for these groups is 12.8% and 12.6%, respectively. Prices on non-foods show moderate growth rates of 5.7% in annual terms (6.4% in December 2018).
The dynamics of prices for paid services remained at a historic low of 0.8% in annual terms (4.5% in December 2018). There is a decrease in inflation of unregulated services, which is associated with reduction in production costs amid falling utility and gasoline costs. The inflationary expectations of the population in August his year decreased. Respondents estimate that inflation will reach 5.3% over the next 12 months.
“Annual inflation in the medium term will be formed within the target corridor. However, in the short term it is expected to rise as a result of increased consumer demand, accelerated price growth for certain food products, as well as exhaustion in the first quarter of 2020 of the effect of lower tariffs on regulated services, which together creates risks for inflation to go beyond the upper boundary of the target corridor,” the NBK notes.
Expanding domestic demand remains a major factor in inflation. The growth of real cash incomes of the population in January-June 2019 is 5.1%. Real wages in the second quarter of this year accelerated to 8.9%. The growth rate was observed in all sectors of the economy. The expansion of consumer demand is supported by an increase in budget expenditures for social support, wages and continued growth in consumer lending by 24.1% in annual terms in July this year. There is an increase in retail turnover by 5.4% in January-July 2019. Consumer imports in Q1 of this year grew by 4.8%. The main contribution is observed in the import of non-food products, which increased by 7.3%.
Growth in domestic economic activity remains above expectations of the National Bank. In January-July this year, the short-term economic indicator increased by 4.4%, including in construction by 11.5%, trade by 7.5%, transport by 5.4%, agriculture by 3.5%, manufacturing and mining industries by 3.2% and 2.4%, respectively. Such dynamics is supported by the expansion of investments, which in January-August 2019 increased by 11.3%. Demand for imported investment commodities rose by 24.9% due to the implementation of large infrastructure and investment projects.
“In 2019, Kazakhstan’s economic growth is to be 3.8%. In the medium term, Kazakhstan’s economy will slow down slightly, but remain at relatively high levels - 3.5% in 2020. In the short term, the main drivers will be expanding household consumption and growth of investment activity. A subsequent slowdown in economic growth is forecasted as a result of a weakening of the effect of fiscal incentives and a decrease in the dynamics of net exports,” the National Bank said.
Amid growing consumer and investment demand, the output gap, i.e. difference between actual and potential GDP, forecast horizon will be in the positive zone, signaling the presence of pro-inflationary pressure in the economy.
External factors will negatively impact domestic prices. Oil prices have declined this year. Since the beginning of the year, the average price level made $ 65 per barrel of BRENT oil ($ 72 per barrel of BRENT oil in 2018). In recent months, there has been an increase in oil price volatility. Since mid-July 2019, world oil prices began to fall due to weak demand and high production in the United States, which together led to an increase in world oil reserves.
The FAO food price index has grown by 5.1% since the beginning of this year as a result of grown consumption and the expected reduction in stocks of selected types of food. In particular, since the beginning of the year, world prices for meat (11%) and bakery products (14%) have risen substantially. Rising global food prices are not fully offset by a slowdown in inflation in Kazakhstan's trading partners. External monetary conditions softened as a result of the reduction by central banks of their key rates, changes in rhetoric regarding the future path of rates, and also measures to stimulate the economy.
External factors in raising the forecasted inflation trajectory are unresolved differences in trade policy between the leading economies of the world and, as a result, increased trade wars and a slowdown in the global economy, which reduces the demand for Kazakhstan exports. "A rise in the base rate will increase the attractiveness of tenge assets and reduce the risk of inflation rise through higher prices for imports. Current monetary conditions are assessed as neutral. The base rate in real terms (taking into account expected inflation to the end of the forecast horizon) remains within the target parameters 3.0-3.5%, "the National Bank emphasized.
Further decisions of the National Bank on the base rate will be made taking into account the correspondence of the emerging and projected dynamics of inflation relative to the target corridor of 4-6% for 2019-2020, dynamics of risks from the domestic economy and the situation on the world market.
The next resolution on the base rate will be announced on October 28, 2019 at 15:00 local time. Since the beginning of 2019, the base rate in Kazakhstan has been at the level of 9.00%.
Reported by the Kazakhstanskaya Pravda.