It is the third rate cut in a row by the National Bank of Kazakhstan (NBK) and in line with the central bank's guidance from March that it would continue to gradually reduce its base rate toward a neutral policy stance, in which there is a balance between the pursuit of price stability and economic growth.
The rate cut comes after the central bank last week confirmed its economic outlook and said there was a high likelihood that inflation this year would ease to below the lower boundary of its 5-7 percent target range.
The NBK has now cut its key rate by 100 basis points this year and by a total of 775 points since embarking on an monetary easing cycle in May 2016.
Inflation in Kazakhstan rose slightly to 6.6 percent in March from 6.5 percent in February due to a rise in the cost of some imported products based on world market prices along with an "emerging increase of the domestic demand among households," NBK said.
However, inflationary expectations are continuing to decline, with expectations for one-year ahead down to 5.8 percent in March from 7.1 percent in December.
The exchange rate of Kazakhstan's tenge also remains favorable, the central bank said, noting oil prices are above US$65 per barrel while inflation in its main trading partners is moderate.
Despite the recent hit to Russia's stock market from new U.S. sanctions, the NBK said it still sees the external sector as positive and the recent volatility in the tenge's exchange rate in response to the fall in Russian assets was considered "short-term and moderate."
"This is why the National Bank does not consider it necessary to tighten the monetary policy conditions as a response to tenge deprecation," the central bank said.
The tenge fell by up to 3.8 percent last week on worries over Russia but was still trading at 329.2 to the U.S. dollar today, 1.1 percent higher than at the start of the year.
In August 2015 the tenge plunged following the central bank's move to a floating exchange rate regime and has been relatively steady since May 2016 when the central bank started cutting rates.
The NBK moved to a floating exchange rate regime 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.
Economic activity in Kazakhstan is continuing to strengthen on the back of broad-based growth in such sectors as mining of oil and iron ore, engineering, agriculture, trade and transportation.
Despite a 4.5 percent decline in building industry in January-February, the central bank said fixed capital investments had expanded by 54.4 percent in the first two months.
Gross Domestic Product grew by an annual rate of 4.0 percent in the fourth quarter of last year and in its inflation report from February the central bank forecast 2.9 percent growth this year and 2.8 percent in the first nine months of 2019.
The National Bank of Kazakhstan issued the following statement:
"The National Bank of Kazakhstan has decided to reduce the base rate to the level of 9.25% with a corridor of +/-1%. The National Bank confirms its estimates regarding the continuing deceleration trend of the inflation until the end of the current year and during the next one. The inflationary expectations have continued to decrease. In spite of the observed volatility in the Russian stock and FX markets, the medium-term influence of the fundamental factors of the external sector is estimated as positive. According to the estimates of the National Bank, if the current dynamics of the macroeconomic indicators persist, the inflation rate will remain within the target corridor of 5-7% in 2018.
In March the annual inflation rate has amounted to 6.6%. The growth of the production costs, a certain increase of the import costs under the influence of the price growth in the world markets and the emerging increase of the domestic demand among the households remain to be the main inflationary factors. The inflationary expectations of the households continued their gradual decrease. The results of the households’ survey show that the expected inflation rate for a year ahead has decreased from 7.1% in December 2017 to 5.8% in March of the current year, reaching the historical minimum since the beginning of 2016. The indicators of the perceived inflation in March have remained on the same level as in February. The share of responders, who believe that in the past year the prices of goods had been increasing more rapidly than before, has amounted to 49% (52.1% in December 2017).
The economic activity continues to demonstrate the positive dynamics. In January-February of 2018 the short-term economic indicator has increased by 5.2% in the annual terms. The positive growth rates in mining (crude oil and iron ore production increase) and mechanical manufacturing industries (growth in metallurgy, food production and in engineering), agriculture, trade and transportation industries persist. However, the decrease in the building industry by 4.5% is being observed. The growth rate of the fixed capital investments in January-February of 2018 has amounted to 54.4%.
The situation in the foreign markets remains favorable for Kazakhstan. The dynamics of the external fundamental factors has not changed since the period of previous decision on the base rate. Since the beginning of the year the oil prices have been formed at the level above 65 US dollars per barrel. The inflation rates in the countries – main trade partners are evaluated as moderate. The influence of the risks coming from the countries – main trade partners, mostly, the Russian Federation, which have become a reason for the short-term volatility in the domestic FX market in the past few days, is assessed as short-term and moderate. That is why the National Bank does not consider it necessary to tighten the monetary policy conditions as a response to tenge depreciation.
The monetary policy conditions continue to tend to neutrality in influencing the economy, keeping a balance between maintaining the price stability and promoting the attainment of the economic growth rates close to its potential level. Along with that the National Bank of Kazakhstan will continue the policy of the gradual reduction of the base rate, securing the maintenance of the neutral monetary conditions.
The next decision on the base rate will be announced on June 4, 2018 at 17:00 Astana time. "
www.CentralBankNews.info
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