Kazakh Central Bank Lifts Rate to Boost Tenge, Restarts Lending

  • Inflation quickened to 14.4% in January, fastest since 2008
  • Kazakhstan is following Russia with 12-month lag, Citi says

Kazakhstan’s central bank resumed operations with lenders and raised its benchmark borrowing rate as policy makers in Central Asia’s biggest energy exporter sought to buttress the currency and cap the fastest inflation since 2008.

The regulator lifted its base rate to 17 percent from 16 percent starting Feb. 2 in a decision aimed at “stabilizing the financial sector, resuming trust in the national currency and creating conditions to shape the tenge yield curve,” it said in a statement.

Kazakhstan is wrestling with the consequences of the collapse in crude prices and devaluations by its main trade partners that forced it to switch to a free-floating exchange rate in August and allow the tenge to tumble. The currency has lost almost half its value in the past 12 months and is the worst-performer globally after fellow oil-producer Azerbaijan’s manat. Annual inflation in Kazakhstan surged to 14.4 percent in January.

"It’s a twofold attempt to respond to rising inflationary pressures related to the effects of the weakening tenge," Ivan Tchakarov, chief economist for Russia and the Commonwealth of Independent States at Citigroup Inc. in Moscow, said by e-mail. The goal is also to “increase tenge attractiveness" by making it more appealing to hold local-currency deposits and securities, he said.

Tight Liquidity

Policy makers will adhere to the free float regime and the next rate decision will be announced in March, the central bank said.

Despite the flexible rate, the tenge has remained under pressure and tight domestic liquidity conditions pushed short-term money market rates to 25 percent to 80 percent in January, and even 100 percent in late 2015, Dmitry Polevoy, chief economist for Russia and CIS at ING Groep NV in Moscow, said by e-mail.

Speaking in a Bloomberg interview on Jan. 22, Kazakh Prime Minister Karim Massimov said that “some sort of assistance to the banking system from the point of view of providing liquidity will be necessary.”

The moves by Kazakhstan’s central bank are similar to steps taken in Russia, albeit with a lag, according to Tchakarov. The Bank of Russia also lifted its key rate to 17 percent in December 2014 as market turbulence peaked. It had set the ruble exchange rate free the month before.

"In terms of the sequence of events, they are just following Russia by a year," Tchakarov said.

Higher rates aren’t sufficient to slow inflation because it’s a product of the tenge’s slide, according to Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. The tenge climbed for a fourth day on Monday, adding 1.4 percent to 360.20 per dollar, and paring its retreat this year to 5.4 percent.

"This decision is purely cosmetic,” Miklashevsky said. “It won’t affect inflation, which is a consequence of tenge weakening.”

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