Publications by topic Base Rate

According to RMCI dynamics, there is a further monetary ridigity strengthening in May 2023. The Index components have an undirectional effect on prices, while the main contribution to the monetary conditions tightening is made by the exchange rate component. And both RMCI Index components began to deviate more strongly from their equilibrium value following May 2023 results.

Despite the increasing transition of the real interest rate to the zone of positive values, provided by the weakening of price pressure while maintaining the NBK base rate at 16.75%, it has a weak deterrent effect on household consumption behaviour. 

Firstly, the household decisions to save or spend come from their inflation expectations, which by the end of May 2023 were higher than the actual dynamics of price growth (17 vs. 15.9) and reflect the intuitive expectations of economic agents of further inflation growth due to the influence of price conjuncture in the housing and fuel markets. Secondly, the availability of consumer credit, as well as active fiscal leverage increases incentives to keep consumer demand excessive, which continues to create an imbalance in market forces.

The continued expansion of the positive gap in the real effective exchange rate of tenge that was provided by a high base rate leads to an increase in the restraining effect of monetary conditions on the import component of prices. Thus, the main influence of monetary conditions is mostly expressed in the control of the external component of consumer inflation. While measures aimed at limiting domestic price pressure do not work due to the inconsistency of macroeconomic policy measures and the weakness of the percentage channel of the monetary policy transmission mechanism.  
 

In March, the market dynamics of the national currency were maintained. The Exchange Market Pressure Index increased by 0.1 percentage points, however, the Index value itself is still in the zone of external pressure absence. Such dynamics are primarily due to the growth of international reserves and the National Fund assets, as well as the growth of the average weighted TONIA rate.

The Exchange Market Pressure Index increased by 2.9 percentage points in February, but its value still indicates the absence of excessive pressure on the exchange rate. Now, the exchange rate dynamics reflect the balance of market factors to the greatest extent. The chart below shows an abnormally high growth of the Index in March 2022 (+31.6 p.p.), which occurred due to a decrease in international reserves and a sharp increase in the base rate. The surges were observed in June (a decrease in reserves by 3%), in August, September (the impact of an increase in the base rate) and December (an increase in TONIA rate). Such a change in the Index indicates a certain degree of interference in the foreign exchange market

We have published our vision of the development of the macroeconomic situation and forecasts for the key economic indicators.

The risk map area has expanded compared to last month due to the destabilization of the global financial sector. At the same time, there is a systematic reduction in the economic risks that have dominated the past year, such as inflation and supply chain disruption.

The current situation with Western banks leads to an increase in the risk premium on loans and the stock market. This situation is a natural result of the implementation of strict measures on monetary policy and improper risk management of several banks and not a systemic financial crisis.

Kazakhstan's economy is showing good growth rates. The expansion of fiscal stimulus, stabilization in the mining industry and the expected easing of price pressure were factors in the revision of GDP growth outlooks from 3.8-4.3% to 4.0-4.5%. At the same time, we note a steady overheating in the economy due to excessive demand stimulation. On the one hand, this leads to high GDP growth values, and on the other hand, it affects the preservation of inflation and the maintenance of high values of the base rate.

The weakening of external inflationary pressure, a stable exchange rate and the long-term maintenance of restraining monetary conditions that limit consumer activity, together with the weakening of risks from inflation expectations, caused the revision of the future dynamics of consumer inflation forecasts. According to our new baseline scenario, inflation will decrease to 13.4% (the previous estimate is 15.1%). The outlook for the tenge exchange rate provides for its weakening to 477 tenge per US dollar by the end of the year, and at the level of 456-466 in April.

Monetary conditions tightened somewhat and became more disinflationary in December 2022. This happened while simultaneously REER forming at a level above its potential and reducing the negative gap in the real interest rate. The value of the RMC Index is in the zone of restraining monetary conditions and close to the neutral zone border.

The REER value for the period under review remained at the level of November 2022, which was facilitated by the continued favourable terms of trade. The trend of the REER strengthening observed in the last 5 months of 2022 should limit the price competitiveness of Kazakhstan producers in foreign markets. However, the periodic shortage in certain commodity markets due to geopolitical tensions reduces the possible negative effect on Kazakhstan’s export revenue. A slight reduction of the positive gap in the exchange rate component is a positive trend since this fact corresponds to a gradual correction of the REER value from its significant overestimation to a more fundamentally determined equilibrium value.

At the same time, the interest component gap was closer to 0, and the real interest rate was less negative. This is due to the base rate increase of 75 bps in early December and, contrary to the shock measures taken by the regulator in November 2022, a deterioration in inflation expectations, as well as an increasing excess of tenge liquidity by fiscal measures to support economic activity.

In November 2022, the monetary conditions continued to slightly tighten. This was due to the REER formation at a level above its potential with the continued strengthening of the real effective exchange rate of tenge, as well as the reduction of the negative gap in the real interest rate. 

The RMCI value has moved into the zone of restraining monetary conditions for the first time since May 2022. Taking into account the NBK's latest rhetoric on a clear intention to complete the cycle of rate hikes, the impact of the interest component in the short term (until inflation moves into a downward trend) will have an effect close to neutral. As inflation declines, as well as if the positive gap in the REER remains, monetary conditions will be restraining closer to neutral, so as not to suppress business activity and cool the increased inflationary background. 

The components of the Monetary Conditions Index continue to have conflicting effects on inflationary processes and economic prospects. The exchange rate component restricts them, while interest rates have a more stimulating effect on business activity growth and weakly limit consumer and investment demand. 

Jusan Analytics team summed up the economic results of the year and identified 5 major events of 2022

The dynamics of Monetary Conditions Index (RMCI) signal a change in the parameters of monetary conditions in the domestic economy. In October, monetary conditions became tougher compared to the previous 3 months and the Index value corresponds to the transition from stimulating to neutral monetary conditions.

The components of the Monetary Conditions Index have a multidirectional effect on inflationary processes and economic prospects. Thus, the interest rate component has a stimulating effect on business activity growth, and on the contrary, the exchange rate component causes harsh conditions that restrain aggregate demand and slow economic growth and inflation.

According to October data, interest rates were not high enough to limit consumer and investment plans of economic units. And as a result, the stimulating pressure on economic growth and inflation has increased relative to the previous period in terms of the real interest rate.

According to the results of September, the dynamics of the Real Monetary Conditions Index1 (RMCI) still correspond to the stimulating conditions, but its value came close to the neutral zone. Neutral conditions eliminate the stimulating effect on the short-term growth of several sectors of the economy, allowing further changes to reflect the real balance of factors to a greater extent.

The shift of monetary conditions closer to neutral ones was ensured by a positive gap in the real effective exchange rate of tenge. In general, the deviation of the REOC from the equilibrium value is insignificant, and this indicates its compliance with the fundamental level.

According to the results of August 2022, the dynamics of the Real Monetary Conditions Index (RMCI) signal the preservation of stimulating conditions in the economy, contributing to the growth of aggregate demand and business activity.

This, for the most part, is facilitated by an even greater transition of the real interest rate to the negative zone (-2.26% at the end of August against -1.91% in July). There was a reduction in the previously observed record negative gap by more than 3 times by the real effective exchange rate of the tenge in August, this is due to the tenge strengthening against the ruble and the euro in nominal terms, as well as an increase in the inflation rate in the European Union. At the same time, the current gap in the real effective exchange rate of tenge still has a stimulating effect on trade activity in the country.