The National Bank lowered the base rate to 11%

Murat Temirkhanov, Assan KurmanbekovFebruary 21, 2017

On February 20, the National Bank decided to cut the base rate to 11%. This decision was quite unexpected in light of the tougher rhetoric on further steps regarding the decision-making on base rate, which accompanied the previous rate cuts in October and November 2016.

On February 20, the National Bank decided to cut the base rate to 11%, with a corridor of +/ -1%. This decision was quite unexpected in light of the tougher rhetoric on further steps regarding the decision-making on base rate, which accompanied the previous rate cuts in October and November 2016, when the size of the rate cut went down from previous 1pp to 0.5 pp.

Despite substantially slumped incomes and depressed lending during the November and December 2016 there has been a serious acceleration of inflation. As a result, the level of annual inflation went over the NBK inflation target of 6-8% and by the end of the year amounted to 8.5%. Inflation in January came in at 7.9% yoy and was back into the target corridor of 6-8%, after exhausting base effect.

We believe, that the risks of accelerating inflation continue to stay heightened. In particular, the fuel market, the tariffs of natural monopolies, industrial producer prices, and so on. In view of the fact that one-third of the imports come from Russia, some pressure on inflation bring the depreciation of the exchange rate of tenge relative to the rouble that took place in the past 12 months.   

No less significant impact on inflation may have additional amounts of target transfer (1 trillion) from the National Fund within the framework of expanding budget spending this year.

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Our view

We believe, that the base rate cut, and the increase in the pace of rate change, might be dictated by the instructions issued by the head of State to the National Bank and the Government to address the problems of the scarcity of money in the economy and high interest rates (the President’s annual address from January 31, 2017). 

NBK removes large amounts of liquidity from the banking sector (> 3.4 trillion tenge) and quite a big reduction in the base rate would reduce the profitability of liquidity withdrawal tools that will contribute to the growth of commercial lending, to both companies and households. This, in turn, will have additional pressure on inflation. We believe that after such an unexpected lowering of the base rate, it would be useful to pause for at least six months to assess the impact of interest rates on the economy.