National Bank lowers its base rate to 9.5%

Assan KurmanbekovMarch 06, 2018

On March 5 the National Bank decided to cut the base rate by 0.25% to 9.5%, with the corridor of +/-1%. This decision is framed into a more active policy of the National Bank since the New Year in relation to the base rate. 

On March 5 the National Bank decided to cut the base rate by 0.25% to 9.5%, with the corridor of +/-1%. This decision is framed into a more active policy of the National Bank since the New Year in relation to the base rate. Recall the previous step of the base rate cut was 0.5 pp in mid-January.

In the January release regarding the base rate, the regulator cited «The trend of the further easing of the monetary policy conditions will depend on the situation in the world markets and in the countries – main trade partners, stabilization of the positive trends in the domestic economy, which will determine the accordance of the forecasted inflation with that of the actual».Current changes indeed evolved accordingly to conditions for the reduction of the base rate marked by the NBRK, and thus this time the National bank has demonstrated the consistency of its actions in the framework of previously announced guidance.

In a press release about lowering the base rate, the National Bank noted decrease of inflation at a faster pace than previously expected, inflation expectations were also declining. The pass-through from shocks in the fuel market in the past year, into the prices of other goods weakens. Inflation is fixed in the new corridor of 5% -7%, although it is noted that there is a risk of short-term exit of inflation down from the lower bound of the new corridor. In particular, the National Bank, believes the easing in inflation to come below the 5% in the fourth quarter of 2018, in the absence of shocks on commodity markets.

Besides, the National Bank stressed «due to the continuing negative dynamics of the households’ real money income, recovery of the domestic consumption is happening at a slower rate, which exerts the disinflationary pressure on the consumer price». The situation in foreign markets and in the economy is forming favourably.

In 2019, the National Bank expects inflation to fix in the new target corridor of 4%-6% and reaffirms the goal of 4 percent inflation by 2020. Further steps to reduce the rate are linked to the designated target levels of inflation.

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Our opinion

We believe that the conditions for a reduction of the base rate have already formed sufficiently – the inflation pressure reduced in all components, with the predominantly non-monetary nature. Inflation expectations weaken having factored in previously declared tariff increase plan for the State monopolies, i.e. market participants and consumers were able to adjust their plans in advance.

Real rates for businesses are at excessively high levels, for example, last year the real rate on credits (nominal interest rate on corporate loans minus inflation) in Kazakhstan stood at 6 percent, while in Uzbekistan, Ukraine it was within 3%-3.6%, higher rates were only observed in Russia.

We believe the National Bank will continue to actively reduce the base rate. It will reduce the profitability of liquidity withdrawal tools that will contribute to the growth of commercial banks lending. At the end of this year we see the NBRK base rate at the level of 8-8.5%.