By CentralBankNews.info
Kazakhstan’s central bank left its base rate steady at 12.0 percent and said it expects inflation to reach its target within the next one of two months and the “probability of further easing of monetary policy is increasing provided that the trend is confirmed by macroeconomic data.”
Today’s guidance by National Bank of Kazakhstan, which cut its rate by 400 basis points in 2016, follows its guidance in November that “rapid cuts” to the base rate would be restrained as risks to price stability and confidence in the tenge currency may increase as interest rates decline.
The central bank said it expects inflation in January and February to decline to its target range of 6.0-8.0 percent and then end 2017 between 7.3 percent and 7.7 percent.
Inflation in December eased to 8.5 percent from 8.7 percent in November, as the central bank had expected as households’ inflation expectations are declining and survey respondents no longer expect inflation to rise in the future.
“Fundamental factors indicate that there is a potential for further appreciation of tenge,” the central bank added.
The exchange rate of Kazakhstan’s tenge, which fell sharply in August 2015 following the central bank’s move to a floating exchange rate regime, has been relatively stable in recent months and there was almost no impact on the downward trend in devaluation expectations by financial markets in reaction to the results of the U.S. Presidential election.
The tenge was trading at 331.7 to the U.S. dollar today, up 2.65 percent since the start of 2016.
The central bank’s move to a floating exchange rate regime last year came in response to capital outflows and the conversion of many tenge bank deposits to foreign currency. Oil accounts for about 60 percent of Kazakhstan’s exports and over 10 percent of its Gross Domestic Product.
Kazakhstan’s economy has been improving but despite the positive trends, the central bank cautioned there is “still the possibility of occurrence of external shocks which have potential risks for the economic development of the country,” such as in the oil market and economic growth among the country’s trading partners.
The National Bank of Kazakhstan issued the following statement:
“The National Bank of Kazakhstan has decided to keep the base rate unchanged at the level 12% with a corridor of +/-1 percentage points. Despite the fact that annual inflation in 2016 exceeded the target range, it is expected that the target range will be achieved within 1-2 months. Due to weakness of the factors contributing to its acceleration or volatility, some increase in business activity, uncertainty reduction in global markets and relative improvement in the terms of trade in recent months of 2016, the probability of further easing of monetary policy is increasing provided that the trend is confirmed by macroeconomic data.
The decision on the base rate was made with the account of the following factors.
Annual inflation for 2016 was 8.5%, which corresponds to the National Bank’s estimates and the previous statements that at the end of 2016 the annual inflation would be close to the upper bound of the target range of 6-8%. According to current estimates of the National Bank, in January-February inflation rate will come into the target range. In the following months of 2017 inflation will not show a significant reduction, however, in the absence of negative shocks, will be within the target range. At the end of 2017 annual inflation is expected to be within the limits of 7.3-7.7%.
According to recent survey, inflation expectations of households are being reduced. Expectations of respondents with respect of significant price growth in December 2016 were not justified, and respondents do not expect the acceleration of inflationary processes in the future. Fundamental factors indicate that there is a potential for further appreciation of tenge.
In January-November 2016, the short-term economic indicator that reflects the development of economy’s main sectors accounted for 100.5%, which corresponds to the trend of improvement in the business activity.
Despite the positive trends, there is still the possibility of occurrence of external shocks which have potential risks for the economic development of the country. Among them are the presence of vulnerabilities in the world oil market and the pace of economic recovery in the main trading partners.
The planned rise in budget expenditures on social payments may lead to strengthening of inflation pressure. Therefore, the National Bank considers necessary to keep the base rate unchanged. The next decision on the base rate will be announced on February 20, 2017 at 17:00 Astana time.”