- Kazakh currency is world's most volatile after free-float move
- Central bank introduced new benchmark interest rate last month
Kazakhstan’s central bank raised its new base interest rate to tame the world’s most volatile currency, the tenge, which has struggled to find balance since policy makers moved to a free-floating exchange rate in August.
The overnight repo rate, which was set as the new benchmark after the central bank abandoned the currency peg, was increased to 16 percent from 12 percent, according to a statement on Friday. The regulator also established interest rates for lending at 17 percent and for liquidity withdrawal at 15 percent, according to the statement. The central bank said it narrowed its rate corridor “to reduce the volatility of money-market interest rates and give more clear signals to the market.”
The higher rate may discourage banks from borrowing to buy dollars, said Damir Seisebayev, the director of research at Private Asset Management in Almaty. It “raises the attractiveness of the tenge and stimulates investment in tenge-denominated instruments, while the exchange rate is supported by interventions,” he said by phone.
Kazakhstan’s central bank has been grappling with the effects of currency fluctuations after cutting the tenge loose to help companies compete with China and Russia, the central Asian country’s two largest trading partners. The tenge, which had traded in a band around 185 against the dollar, has swung between 208 and 300 to the dollar since August, and the central bank has spent more than $1 billion to smooth the fluctuations.
The ruble has fallen 41 percent in the past 12 months as oil lost half its value. The tenge is down 33 percent in that period. It traded at 271 against the dollar at 7:27 p.m. on Friday. Umut Shayakhmetova, chief executive officer at Kazakhstan’s second-biggest lender Halyk Bank, called on the regulator to offer more clarity on its new policy for the local currency.
Policy makers have argued that there are no “fundamental macroeconomic factors” that could cause the tenge’s volatility. The central bank will act to smooth the tenge’s movements, though it won’t fight the trend if oil prices continue to decline, Governor Kairat Kelimbetov said in an interview with Panorama newspaper on Sept. 18.
While Seisebayev said stabilizing the tenge will help fuel investment, Vladimir Miklashevsky, an economist at Danske Bank in Helsinki, argued that the higher interest rate will hurt Kazakhstan’s slowing economy, which grew 1.7 percent in the second quarter, the lowest rate since 2009.
“We see significant downside risks for Kazakh economic growth in 2016,” Miklashevsky said. “The national bank had room to cut the rate much lower to boost economic activity, but they chose another path.”
While the weaker tenge helps local companies stay competitive, it also threatens to spur consumer prices. Annual inflation quickened to 4.4 percent in September, the fastest in five months.
Policy makers predict inflation will exceed the central bank’s medium-term target of 6 percent to 8 percent, while the government seeks to keep the rate below 10 percent this year. Consumer-price growth is likely to accelerate to 8.2 percent in December as the devaluation effect kicks in, according to Danske Bank A/S.