Kazakhstan Cuts Rate, Signals More Easing as Inflation Slows

  • Key rate cut to 12.5%; all but one analyst forecast no change
  • Central bank says it may cut base rate again before year-end

Kazakhstan’s central bank unexpectedly cut its key interest rate and signaled the potential for more monetary easing after a stronger tenge helped shore up confidence among policy makers that a surge in price growth to an eight-year high is over.

Rate setters reduced the base rate, set as the new benchmark after the central bank abandoned its currency peg a year ago, to 12.5 percent from 13 percent in their third cut this year, they said in a statement on Monday. Six of seven economists surveyed by Bloomberg forecast no change, with one seeing a fall to 12 percent.

“If the slowdown of inflation follows through and the tendency for a stable drop in annual inflation and stable growth in tenge deposits is confirmed, a reduction in the base rate before year-end isn’t excluded,” the central bank said in the statement.

The resumption of monetary easing resumed after a pause in August as central Asia’s biggest energy-producing economy endures its worst year since 1998. While price growth is abating, it remains more than double the upper end of the central bank’s target band. The regulator will announce its next rate decision, the last of the year, on Nov. 14.

“The most important thing at the moment is to start stimulating the weak Kazakh economy by lowering credit rates and boosting the growth of banking loans,” Aivar Baikenov, head of asset management at Kazkommerts Securities, said by e-mail. “Inflation expectations are getting lower.”

Currency Comeback

The central bank also said it maintained its rate corridor at plus or minus one percentage point. The overnight deposit and lending rates form a band around the benchmark. While the bank didn’t intervene in the domestic currency market, reserves rose 2.3 percent in September to $31.4 billion, Governor Daniyar Akishev said.

After adopting a free-floating exchange rate in August 2015, policy makers lifted their new benchmark to as high as 17 percent this year to halt a selloff of Kazakh assets before reducing it by a cumulative four percentage points in May and July. The world’s second-worst performer last year behind the Azeri manat, the Kazakh currency has appreciated 15 percent against the dollar since falling to a record low on Jan. 21.

The tenge rally has helped curb inflation. Annual price growth slipped to the slowest since April last month, easing to 16.6 percent from 17.6 percent in August. Inflation will slow to the 6 percent to 8 percent range by year-end, according to the central bank. Policy makers previously planned to reduce rates only when the consumer-price index fell within the target band, Akishev said in September.

The government of Kazakhstan, where crude production accounts for about 15 percent of gross domestic product, forecast oil at $35 per barrel and the tenge at 360 per dollar for its 2017-2019 budget. The central bank isn’t obliged to keep the currency at that level, Akishev said on Sept. 20.

Before it's here, it's on the Bloomberg Terminal.