National Bank of Kazakhstan raises key interest rate to 9.25%

National Bank of Kazakhstan raises key interest rate to 9.25%

The National Bank of Kazakhstan decided to raise the key interest rate by 0.25 percentage points to 9.25% while maintaining the interest rate corridor at +/- 1%, reports. Rates on provision and absorption of liquidity increased to 10.25% and 8.25%, respectively. According to the chairman of the National Bank of Kazakhstan, Daniyar Akishev, the official refinancing rate is automatically changed to 9.25%. ”Taking the decision on the key interest rate the previous time, we paid attention to the increased risks that could lead to higher than expected inflation. We confirm our estimates," Akishev said.

According to him, in recent months, an uncertainty in inflation expectations will increase due to the external factors mainly. There is also the inflationary pressure due to the certain internal factors. "Today's solution, in our opinion, will reduce the severity of the problem. The new key rate will increase demand for tenge assets and maintain monetary conditions at a level close to the neutral. But I do not rule out that with continued pressure on consumer prices, further tightening of the monetary conditions is possible,”  the head of the National Bank of Kazakhstan said.

He also spoke about the factors that influenced the decision of the National Bank - the current inflation background is characterized as moderate, the annual inflation in September amounted to 6.1%, being in the middle of the target corridor of 5-7% for 2018. “In the structure of annual inflation, there is an acceleration of the food prices growth against the background of a slowdown of the price growth for non-food products and stability of the annual increase in prices and tariffs for paid services,” said Akishev. This year, the rise in the price of  sugar, cereals, bakery products, eggs, chicken meat, and solid fuels contributes to the preservation of inflation. Prices for fruits and vegetables, fuels and lubricants have decreased since the beginning of the year. The price dynamics for other non-food products and paid services to the population has been moderate.

"The annual price increase in the industrial production in August was almost 24%. Understanding that the reason behind this growth - an increase in the cost of mining products by 37.5% - does not directly affect consumer demand, nevertheless, this price dynamics will create pressure on consumer inflation up to 6-12 months, " the head of the National Bank said. According to his estimates, in the current year, inflation will be within the target corridor of 5-7%, and in 2019, it will smoothly enter the new corridor of 4-6%, being closer to its upper border.

At the same time, according to Akishev, for 9 months of 2018, the gold and foreign exchange reserves of the National Bank, according to preliminary data, amounted to $ 30 billion. The country's international reserves reached $ 86.4 billion.

As Bloomberg writes in the article Kazakhstan Looks to Stave Off Rate Hike With Other ‘Maneuvers’, Kazakhstan’s central bank has a range of options besides changing its key interest rate as it looks to fine-tune monetary policy after markets stabilized and inflation came in below expectations, Akishev said on Friday in Bali, where was attending the annual meetings of the International Monetary Fund and the World Bank.

Central banks across developing economies have already turned to monetary tightening after a sell-off in emerging-market assets triggered by higher U.S. rates and a stronger dollar. In Russia, Kazakhstan’s biggest trading partner, the central bank surprised last month by raising borrowing costs for the first time since 2014. 

Kazakh policy makers also said monetary tightening could be needed to minimize risks from a weakening tenge. Kazakhstan spent about 6 percent of gross domestic product last year to stabilize its financial system with a mixture of capital injections and consolidation measures. The central bank still provides more than 200 billion tenge ($542 million) in loans to more than one commercial bank, Akishev said, declining to elaborate.

Despite a major bond-market reform in late July, when Kazakhstan opened a link with Clearstream Banking SA, one of the biggest bond-settlement systems, the country has struggled to lure foreign capital.  The share of overseas investors in the central bank’s notes “grew, but insignificantly for now,” according to Akishev. “But I don’t think appetite for risk among foreign investors has ended, it will return,” he said.