Kazakhstan Pauses Rate Cuts After Inflation Accelerates
(Bloomberg) -- Kazakhstan paused its monetary easing cycle after a recent weakening of the national currency and an acceleration in inflation last month.
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The National Bank of Kazakhstan kept its benchmark at 14.25% on Thursday, following two consecutive decisions to reduce borrowing costs. Four of six economists surveyed by Bloomberg expected the move, with two forecasting a cut of 25 basis points.
A greater risk of inflation “makes it highly likely that the base rate will remain at the current level until the end of 2024,” the central bank said in a statement.
Annual inflation in July increased for the first time since February 2023, reaching 8.6%, while monthly price growth also quickened. The uptick was in part due to an increase in government spending that began two years ago.
“Inflationary pressure within the economy is increasing,” the central bank said. That’s “due to growing volumes of fiscal stimulus, continuing growth in tariffs as part of the housing and utilities reform, and sustained domestic demand.”
The state has bought tenge with dollars from the national oil fund to help cover the budget shortfall caused by the rise in expenditures. Those transfers in turn supported an appreciation in the national currency during the first half of the year. However, the tenge has weakened about 1.6% since the last rate decision on July 12.
Central Asia’s largest oil producer plans to spend even more next year, relying on bigger transfers from the national fund to bridge the gap in budget revenue. Officials plan to withdraw 5.25 trillion tenge ($10.9 billion) from the oil fund next year.
Those transfers “may lead to an increase of our inflation outlook in the next forecast rounds,” central bank Governor Timur Suleimenov said on Tuesday. The bank also cited the risk posed by uncertainty over how the government will cover its budget gap this year and after 2025 in its statement after the rate decision.
The country’s oil fund transfers may reach about 5 trillion tenge this year, Halyk Finance analyst Sanzhar Kaldarov said in a report. “Ongoing problems with the budget, exchange rate and dynamics of withdrawals from the oil fund” remain, and will force the bank to “act more conservatively” with rate cuts, Kaldarov said.
The central bank said it expected inflation at 5.5% to 7.5% next year. The central also forecast the economy to grow 3.5%-4.5% this year and 5%-6% in 2025, helped by a plan to increase oil production.
The central bank, whose next policy meeting is scheduled for Oct. 11, maintained its rates corridor — formed from the overnight deposit and lending rates — at plus-or-minus one percentage point around the benchmark.
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