The monetary policy of the NBRK for 2018

Assan KurmanbekovDecember 12, 2017

The National Bank published "The main directions of the monetary policy of the Republic of Kazakhstan for 2018". As the primary target, NBRK aims to fix the inflation at a low level, as well as, to reduce its volatility.

On December 11, the National Bank published "The main directions of the monetary policy of the Republic of Kazakhstan for 2018". As the primary target, NBRK aims to fix the inflation at a low level, as well as, to reduce its volatility.

The level of consumer inflation during the most part of this year was at the level of 0.3% on the monthly terms. Inflation spikes at the beginning and at the end of this year have led to an increase of its level to up to 1%. The main components of consumer inflation demonstrated more moderate values this year, in comparison with the previous year: food products grew by 5.3% from the beginning of the year (7.8% in November 2016), non-food items +8.4% (8.6% in November 2016), services + 5.6% (6% in November 2016). At the same time, prices for diesel fuel increased by 31% since the beginning of this year (39% in November 2016), on petrol by 19% since the beginning of this year (4% in November 2016). Thus, the price growth was less pronounced this year, without taking into account the last month of the year. The deregulation of the fuel market, disruptions in supply of petroleum products in the domestic market in connection with repairs to oil refineries and the weakening of the tenge to the ruble from 5.5 to 5.9 for the ruble in September and October of this year significantly affected the fuel prices.

The money supply, aggregate (M3) after increasing almost 16% last year, stood practically unchanged in the 10 months of this year. Hence, the nominal growth of the economy at 9% since the beginning of this year have been levelled off by the lack of active growth in deposits and loans of banks along with significant liquidity absorption by the NBRK.

The size of the base rate in the current year was cut by almost 2pp to 10.25%, by 1pp in February, 0.5 pp in June and 0.25 pp in August. Due to serious acceleration of inflation in October and November the NBRK apparently refrained from further rate cuts at the end of November. On this basis, it can be concluded that the next changes in the base rate will be within 0.25 pp.

The real interest rate (the difference between the base rate and inflation) during the year ranged from 2.6% to 4.2% and stood at an average of 3.4%.

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According to the NBRK forecasts, the inflation will enter the 5-7% range in 2018, in 2019 the corridor of inflation decreases to 4-6%, followed by the inflation being below 4% starting from 2020.  The level of real interest rate in the forecast period remains at a level not higher than 4% and will act as a benchmark indicating the direction of monetary policy.

In order to improve the efficiency of the transmission mechanism, the regulator, in addition to maintaining the current instruments of standing facility (repo, deposits) and open market operations (NBRK notes, deposit and loans auctions), in 2018 aims to complete the work on improving the effectiveness of the minimum reserve requirements. Establishing a new level of standards will also support the process of structural excess liquidity withdrawal in the banking sector.

According to NBRK, the impact of interest rates on the exchange rate is weak because of the low mobility of capital, which leads to the fundamental dependence of nominal rate on the trade balance. At the same time, historically changes in FX rate quite strongly affects the inflation (the pass-through effect to CPI is 12%). In addition, this influence is asymmetrical (tenge appreciation does not lead to substantial reduction in prices). 

Key risks for inflation the National Bank sees the fiscal policy and adverse changes in market prices on the domestic and foreign markets.

Our opinion

The entrance of inflation in the 5% -7% corridor next year, in our view, is quite realizable. But its further reduction to 4%, in our view, can be problematic, given that it requires symmetric changes in the qualitative structure of the economy, that are difficult to implement in a short period of time. In this regard, the target of 4% on inflation could be seen as an element of expectations formation. It seems that the more moderate shift in the corridor (5.5%-7.5%, etc.) established by the NBRK in light of recent inflation developments would have been more reasonable, moving the target in a more practical sphere.