Kazakhstan National Bank raises base interest rate to 16%

The National Bank of Kazakhstan has decided to raise its base interest rate from 12 to 16 percent to curb inflation, Tengrinews reports citing the press service of the central bank.

The standing facility interest rates will be 17 percent for lending liquidity and 15 percent for withdrawing liquidity. It was also decided to narrow the interest rate corridor to ± 1 p.p. in order to reduce the volatility of interest rates in the money market and give clearer signals to the market.

The National Bank of Kazakhstan explained that the base rate was the interest rate, which, according to expectations of the financial regulator, will be used at the financial markets for overnight loans between market participants. In turn, it is expected that the banks will use the base rate as a guide in determining interest rates on loans.

The global economy growth pace is moderate due to economic recovery in the developed countries of the euro zone and the United States. This positive effect of the global economic growth, according to Kazakhstan's central bank, is counterbalanced by the slowdown in developing economies.

Economic slowdown in China and other emerging markets caused the latest turbulence in global financial markets and a drop of commodity prices. Russia’s deepening recession, likewise, weakens the growth prospects of emerging economies.

Federal Reserve kept the benchmark interest rate unchanged, but rates could still rise before the end of this year. This increases the risk of potential capital outflows from emerging markets and uncertainty about the future growth of Kazakhstan’s economy, the official press-release said.

Explaining the decision, the National Bank noted that Kazakhstan's GDP growth slowed down in the first half of 2015 as a result of a sharp decline in exports due to the fall in commodity prices. Imports, in turn, decreased due to a decline in the domestic demand owing to lower real incomes. Inflation has fallen since the beginning of 2015 as a result of the reduction in import prices and a slowdown in the domestic economy. However, the National Bank expects that the recent transition to a floating exchange rate and tenge’s devaluation will in the short term increase the risk of inflation going above the target level of 6-8 percent.

"The recent excessive volatility of exchange rate might negatively affect inflation expectations. However, in the medium term implementation of the current monetary policy will keep inflation at the target level. Considering the economic data and the prospects for growth, the National Bank decided to raise its base rate to 16 percent to keep inflation in the medium-term target range of 6-8 percent," the National Bank said. The next decision on monetary policy is scheduled for November 6, 2015.

The last time the National Bank changed the base interest rate was in September this year, when the repo rate was set to 12 percent.

By Indira Urazova