Kazakhstan’s central bank cut its key interest rate to 13% from 15% on July 11 saying risks of inflation accelerating further are minimal.
The move surprised the market as the majority of analysts polled by Bloomberg expected the bank to keep the rate on hold as inflation accelerated to 17.3 % y/y in June, the highest level since August 2015, when the country abandoned its currency peg and adopted a free-floating exchange rate regime. This is the central bank’s second rate cut since it introduced the base rate last year.
Despite double-digit CPI readings, policy makers in Almaty consider inflation risks are abating. “Inflation fully corresponds to the forecasts of the National Bank, and the risks of acceleration of the inflation under current conditions are minimal, which with a high probability allows expecting inflation to achieve the upper limit of the 6-8% inflation target band by the end of 2016,” the bank said in a statement. “Taking into account the time lag effect of the base rate on inflation, which is estimated to take up to one year, the decision to reduce the base rate confirms the confidence that inflation will remain within the target band over the horizon of twelve months and up until the end of 2017.”
The central bank’s decision to cut the benchmark comes as policy makers raise concerns about the economy, which is at risk of posting its first contraction since 1998.
The decision to cut the base rate also reflects positive developments on the global market, such as a rebound in oil prices, which helped the local currency to strengthen by some 12% since January 21, when it touched a historical low of KZT383.91 against the US dollar. Stronger confidence in the tenge resulted in the conversion of forex bank deposits into local currency. As a result, the share of foreign currency-denominated deposits decreased from a peak of 70% in January to 60% in May. The share of forex retail deposits fell from 80.4% to 70.6%.
“A structural liquidity surplus is observed in the money market, therefore the National Bank continues to actively conduct operations on absorbing excess liquidity,” the bank explained. “Low credit activity and demand for credit resources do not allow the liquidity to flow into the real economy, thus limiting the risk of accelerating inflation.”
The bank’s next policy setting meeting is scheduled for August 15.
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