By CentralBankNews.info
    Kazakhstan’s central bank has set a new base rate of 12.0 percent aimed at anchoring nominal money market rates and keeping inflation within its medium-term target range of 6.0 to 8.0 percent following its decision last month to float the exchange rate of the tenge currency.
    The National Bank of Kazakhstan previously used its refinancing rate as its main rate, but this was largely an indicative rate and was held unchanged at 5.50 percent since August 2012.
    The central bank, which let the tenge float on Aug. 20 as part of its shift to an inflation targeting regime, said it would use the base rate to keep consumer prices within its target corridor and “reserves the right to participate on the foreign exchange market in order to ensure financial and price stability.”
    In addition to auctioning securities when liquidity is excessive and buying them when liquidity is deficient, the central bank said its standing lending and deposit facilities will be available “without limitations” to banks by depositing funds at the base rate of 12 percent minus 5 percent while they can borrow funds at 12.0 percent plus 5 percent.
    Kazakhstan’s inflation rate eased to 3.8 percent in July from 3.9 percent in June but the central bank said it expects inflation in the short term to rise above its medium term target due to the impact of a recent depreciation of its exchange rate.
    “However, should inflation expectations rise, the National Bank will tighten its monetary policy by increasing the base rate,” the central bank said.
    Following the float of the tenge last month, its exchange rate immediately plunged to 251 to the U.S. dollar from 188.4, or by 25 percent. But since then, it has firmed slightly and was trading at 240.3 to the dollar today.
   In mid-July the central bank widened the trading band of the tenge against the dollar as a step toward a free float planned after 2016. On July 15 the tenge’s trading range was widened to 170-198 to the dollar from 170-188 tenge.
    But the plunge in oil prices and Russia’s ruble meant that Kazakhstan’s exporters were having a hard time competing, putting pressure on the government to let the currency depreciate. China’s decision on Aug. 11 to devalue the exchange rate of the yuan by giving market forces a greater role added further pressure.
  Kazakhstan’s economy has been hit by the fall in the prices of crude oil and other commodities, a reason that upward pressure on inflation will be weak. With weak demand from its major trading partners and the drop in oil prices, the central bank said real Gross Domestic Product grew by 1.7 percent in the first half of the year, down from 3.9 percent in the same 2014 period.
    For 2015 the central bank projects growth of 1.5 percent.

    The National Bank of Kazakhstan issued the following statement:
   
“The National Bank of Kazakhstan has set its base interest rate, the one day (overnight) repo rate, at 12%.

This policy rate is the reference rate. It is aimed at anchoring nominal money market rates and will form the key instrument of monetary policy, supported by open market operations under the new inflation targeting regime. Now that the exchange rate for the tenge is floating, the National Bank’s interest rates will be used to keep consumer price inflation in its target corridor. The National Bank reserves the right to participate on the foreign exchange market in order to ensure financial and price stability.

The National Bank sets its base rate target at the level most likely, in its judgment, to produce the inflation target within the corridor of 6-8% in the medium term. Because of the long lags between changes in the monetary policy and inflation outcomes the level of the base rate set today has limited effect on inflation in the near term. The setting today is chosen to achieve the medium term target, but it is subject to review and adjustment. The National Bank will use its policy instruments to maintain market liquidity consistent with its target for the base rate. It will auction securities to the market when liquidity is excessive and will buy them when liquidity is deficient. In addition, the NBK standing lending and deposit facilities will be available without limitations to banks for depositing funds at 12-5% (where 12% is the base rate) or borrowing them at 12+5%.

The National Bank expects that in the short term inflation will raise above its medium term target because of the increase in the price of imports from the recent exchange rate depreciation. In the medium term, however, the current base rate is expected to produce the inflation rate within the corridor of 6-8%. However, should inflation expectations rise, the National Bank will tighten its monetary policy by increasing the base rate.

The current base rate is set taking into account contemporaneous economic events and their likely persistence, but the primary target is medium term inflation and the rate is not set in reaction to short term disturbances. International Monetary Fund expects the global economy to grow by 3.3% in 2015. The slowdown in global economic growth and the associated decline on commodity prices have led to weaker currencies in China and Russia, Kazakhstan’s major trading partners. In addition, the strengthening of the US dollar due to the expected increase in the federal funds rate as well as depreciation of the euro requires quick adaptation to external conditions.

The decline in growth of domestic economy will dampen the short-term inflationary pressures. Weaker demand from Kazakhstan’s major trading partners and the drop in oil prices have led to a slowdown in real GDP growth of Kazakhstan to 1.7% in the 1st half of 2015 (3.9% in 1st half 2014). This year, real GDP is projected to grow by 1.5%.

The expected moderate growth of the global economy as well as low prices of commodities will reduce prospective growth from the foreign sector and affect the balance of payments negatively. The likelihood of this scenario is taken into account in the base rate settings.”

    www.CentralBankNews.info