Kazakhstan expands tenge to US dollar exchange rate corridor

Kazakhstan’s National Bank has expanded the tenge to US dollar exchange rate corridor once again - to unprecedented 28 tenge, Tengrinews reports.

Central bank Governor Kairat Kelimbetov made the announcement today at the briefing in Astana. He also spoke about the current financial situation in the country and devaluation outlook of the coming months. 

“The monetary policies will remain unchanged in the next six months. But to make the exchange rate more flexible and transition to inflation targeting in the medium term, as well given the fact that the tenge to US dollar exchange rate has almost reached the ceiling of its corridor, the National Bank of Kazakhstan has made a decision to expand the tenge to US dollar exchange rate corridor from the current 185 tenge (per 1 dollar) +3/-15 tenge to 185 +13/-15 tenge,” Kairat Kelimbetov announced today.

Kazakhstan plans to introduce inflation targeting in 2020. It is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. Kazakhstan wants it to make the country less depended on its currency exchange rate, improve its financial stability and population's trust in the tenge's value and reduce dollarisation of the economy.   

Kazakhstan is maintaining its currency - the tenge - in a pegged corridor, calling it a managed float. After the 19% devaluation of the tenge in February 2014 (from 155 to 185 tenge per dollar) it set the fluctuation corridor to 6 tenge: 185 tenge per US dollar +/- 3 tenge. In September the same year it expanded the corridor to 18 tenge -185 tenge per US dollar +3/-15 tenge - in an attempt to calm down the rampant devaluation expectations in the Central Asian country. 

Governor Kelimbetov explained the decision to once again change the corridor by the need to “create more space for manoeuvre within the next 12 months”.

“We now have a more symmetrical corridor – minus 15, plus 13 – which we believe allows us to carry out more balanced and coherent policies and provides a greater flexibility to the exchange rate," he said about the expansion to the fluctuation corridor to unprecedented 28 tenge.

"We think that in general this approach is moderate and stable. It enabled us to withstand all the problems of 2014 and resist the pressure from the external markets. We also believe that it is capable of addressing the challenges of the next 6-12 months," Kelimbetov said. 

The "problems of 2014" that he referred to were low global oil prices and financial crisis in Russia. Kazakhstan is very dependent on global prices of oil, metals and other raw materials because these commodities constitute the main part of its exports. As for Russia, Kazakhstan is greatly dependent on it because of the advanced integration of their economies, their geographical proximity, open customs borders and shared labor market. After the conflict in Ukraine erupted, many countries - mostly the United States and the European Union - imposed sanctions against Russia triggering a spinning devaluation of the Russian ruble. Kazakhstan was not hit by the sanctions directly, but still suffered a lot of pressure both on its currency and its markets. 

In its press-reslease the National Bank even went as far as saying that the loosened exchange rate policies pursued by the Kazakh central bank since the beginning of the year served well to "prevent pressure on the tenge exchange rate from building at the domestic market and to eliminate the need for a forced one-step devaluation of the tenge, like those in 2009 (22%) and 2014 (19%)." 

With devaluation being the first thought at the mention of the expansion of the corridor upwards, journalists rushed to ask Kelimbetov whether Kazakhstanis had to expect the tenge to US dollar exchange rate to reach 198 tenge per 1 US dollar (basically meaning a new 7% devaluation) tomorrow.

Kairat Kelimbetov assured them that there was no reason to fear and promised that the tenge exchange would not rocket to the ceiling in the next three months.

It took six months for the tenge to weaken by 2.5 percent, he explained. "The tenge to US dollar exchange rate has been fluctuating around 187 during the month, there have been no big changes, and I don't see any reason why a high demand (for US currency by buying it) would suddenly be created. The tenge will continue fluctuating in around the same manner. (...) As to the figure (over 190) that you mentioned here, we will reach that figure eventually, but not in the next three months," Kelimbetov assured.

“The National Bank is not going to move to free floating exchange rate until 2017. The National Bank will continue making interventions at the domestic foreign exchange market to ensure financial stability by absorbing sharp shocks and short-term volatility of the exchange rate. Whereas the long-term trend of the tenge exchange rate will be formed based on the fundamental internal and external macroeconomic factors. This means that the exchange rate changes may occur in both directions - either weakening or strengthening - which will be determined by global economic conditions and the situation at the country’s foreign exchange market,” the Bank said.

By Assel Satubaldina and Tatyana Kuzmina (Asemgul Kassenova contributed to the story)