Kazakhstan's central bank lowered its key interest rate for the second time this year, saying the risks of inflation are now weakening and a second COVID-19 lockdown will curb inflation amid a faster-than-expected decline in economic activity in the first half of the year.
The National Bank of Kazakhstan (NBK) cut its base rate by 50 basis points to 9.0 percent, a surprise to most analysts that had expected the rate to be maintained, and NBK has now cut it by 300 points this year following a cut in April.
But since the start of 2020, NBK has only cut lowered the rate by net 25 basis points and the base rate is now back to the level seen in August last year following an emergency rate hike in March.
Although Kazakhstan's headline inflation rate rose to 7.0 percent in June, the highest since December 2017 and up from 6.7 percent in May, the central bank said this was expected and mainly due to higher food prices while core inflation was growing slower than general inflation
The re-imposition of quarantine measures earlier this month will have the effect of suppressing consumer demand and income, holding back non-food inflation, and while inflationary expectations are stable inflation is expected to rise to 8.0 to 8.5 percent by the end of this year.
But inflation will then gradually decline to the upper boundary of the central bank's target corridor of 4.0-6.0 percent in 2021 from quarantine measures and the decline in economic activity this year.
"The risks of dollarization growth have significantly decreased, which has expanded the potential for lowering rates," NBK said, adding its recent efforts to protect tenge assets had helped lower the level of U.S. dollar deposits to 40.0 percent from 43.1 percent in the last six months.
In contrast to the general easing of global monetary policy in the second half of last year, NBK raised its rate by 25 basis points in September 2019 as inflationary pressures were beginning to rise from robust consumer demand.
In March this year, just as the Covid-19 pandemic was beginning to spread worldwide, NBK then raised its base rate by 275 basis points at an emergency policy meeting on March 10 to protect the value of the tenge, which was falling sharply after oil prices plunged in the wake of a price war between Russian and Saudi Arabia.
Oil accounts from around three-quarter of Kazakhstan's exports and one-third of its economic output.
The tenge plunged 15 percent during March but then began to rebound in early April as oil prices bottomed and continued to climb until early June. Since then the tenge has eased and was trading at 381.8 to the U.S. dollar today, down 8.1 percent since the start of this year.
Kazakhstan's economy contracted by an annual 1.8 percent in the first half of this year, above the central bank's forecast of a 1.5 percent contraction, but mining and manufacturing is now expanding along with construction and agriculture, NBK said.
But the business activity index remains in the negative zone and the slowdown is more likely to be felt in the services and industry sectors, with lower consumer and investment activity putting pressure on aggregate demand despite higher fiscal spending.
"The situation in the external sector remains uncertain," NBK said, noting the risks of another outbreak of the pandemic remains high and weak external demand may limit the growth of the global economy despite the recovery of China's economy.
Other factors of uncertainty include social unrest, a possible deterioration in economic relations between the U.S. and China, continued lower inflation in developed countries, high unemployment and increased debt in some countries.
But the situation on the world oil market is seen relatively positive and oil demand is expected to rise in the second half of this year and in 2021, helping reduce the oil reserves that were accumulated since the start of this year, the central bank added.
www.CentralBankNews.info
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