Kazakh central bank surprises with rate cut as inflation slows

Kazakh central bank surprises with rate cut as inflation slows
By bne IntelliNews October 4, 2016

Kazakhstan's central bank cut its policy rate to 12.5% from 13% on October 3 as inflation eased and suggested more easing might be on the cards.

The rate cut surprised the market as the majority of economists polled by Bloomberg expected the bank to leave the rate on hold. This is the central bank’s third rate cut since it introduced the base rate last year.

Consumer price inflation in the country eased to 16.6% y/y in September from 17.6% in August. September was the second straight month to see price growth easing. Previously, inflation had been on a rising trend for 11 months after the central bank’s decision in August 2015 to abandon its currency peg saw the tenge lose over 40% of its value against the US dollar. The Kazakh currency, however, started strengthening sharply in August and September on the news of OPEC’s agreement to consider a freeze in oil production in November. The tenge reached KZT335 against the greenback on October 4, compared to its record low of KZT383.9 seen on January 22.

In addition, the tenge has been stablising in the past months, which is partially related to economic stablisation and signs of modest recovery in Russia, a key trading partner for Kazakhstan. Increased confidence in the local currency saw the share of dollar-denominated deposits in the country fell to 59% of all deposits in August from 70% at the start of the year. 

The bank will announce its next rate decision, the last for the year, on November 14. The regulator does not rule out the possibility of cutting the base rate further prior to the end of 2016, “provided that the slowdown in inflation and the tendency for a steady decline in annual inflation are confirmed, as well as a stable growth of tenge deposits is observed”, the bank said in a statement.

While price growth is abating, it remains more than double the upper end of the central bank’s target band of 6%-8%. Policy makers previously planned to reduce rates only when the consumer price index fell within the target band, central bank’s governor, Daniyar Akishev, said in September, according to Bloomberg.

On a monthly basis, consumer prices edged up 0.2% in September, registering the same rise as in August. The prices rose 5.6% since December 2015.

Prices of foodstuffs went down by 0.3% m/m but were up by 14.7% y/y in September. Prices of non-foodstuffs rose by 0.6% m/m and 26.6 y/y and of services by 0.4% m/m and 9.4% y/y.

Producer prices for industrial goods went up by 1.1% m/m and 26.1% y/y in August and were 14.4% higher than in December 2015. Producer prices increased by 14.9% in the mining sector in January-September and by 15.2% in the processing sector. Prices of industrial services rose by 2.8% on the monthly basis in September.