01 августа 2014 18:11

Kazakhstan to toughen monetary policies should pressure on Russian ruble persist

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© Tengrinews © Tengrinews

Analysts of Halyk Finance investment company believe that rising inflation rate in Russia may force the National Bank of Kazakhstan (NBK) to toughen its policies, Tengrinews reports.


Analysts of Halyk Finance investment company believe that rising inflation rate in Russia may force the National Bank of Kazakhstan (NBK) to toughen its policies, Tengrinews reports.

Since Kazakhstan is a small economy with a GDP of around $200 billion and a population of 15 million, it is greatly influenced by the neighbouring Russia that has a GDP of over $2 trillion and a population of nearly 144 million. Russia is now subject to a whole range of international sanctions and is finding it hard to harness the inflation. Russia is Kazakhstan's main trade partner and its problems influence it. This pushes the inflation rate in Kazakhstan upwards, exerts pressure of the Kazakh currency and creates prerequisites for a new devaluation in Kazakhstan.

“After a brief lull, the pressure on tenge has again intensified due to persistent excess of liquidity in the system and growing exchange rage margin difference between Kazakhstan and Russia," Halyk Finance analysts said.

On July 25 the Central Bank of Russia once again tighten its monetary policy by raising the benchmark interest rate for the third time this year, now - to eight percent. According to the Central Bank of Russia, consumer prices were growing faster than expected. Geopolitical tensions, new Western sanctions against Russia and their impact on the ruble exchange rate are spurring inflation expectations. And the Russian regulator promised to continue tightening the policies should the inflation risks remain high.

Halyk Finance believes that the volatility in Russia was caused by fear of more sanctions from the West and is of a psychological nature rather then a reflection of the financial reality.

"The growing economic and financial integration of the [Customs] Union countries and reduction of transaction costs allows transnational players to develop and implement effective strategies based on the difference in the cost of funding and other arbitrage-related opportunities. Amid the current soft policies of the National Bank of Kazakhstan, this exerts additional pressure on the tenge. As this point the National Bank of Kazakhstan has sufficient foreign exchange reserves, and the rate of their current spending is acceptable for the Bank. However, the pressure on the tenge will be increasing in the coming months as the inflation (in Russia) will be accelerating and the interest of Kazakh investors to Russian assets will be growing if the margin difference in the rates (between Kazakhstan and Russia) persists. Then, to limit the spending of forex reserves, the National Bank of Kazakhstan will be forced to start tightening the monetary policies like Russia," Mustafin said.

There are a lot of speculations about the possible second wave of tenge devaluation in Kazakhstan, but the analysts believes that for the time being the National Bank of Kazakhstan will be maintaining the tenge exchange rate within the set range of 183 to 188 tenge per 1 dollar and will be supporting the tenge exchange rate as the inflation rate accelerates. 

Writing by Dinara Urazova, editing by Tatyana Kuzmina

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