2020 in Kazakhstan holds rate-economy seen shrinking!

Kazakhstan’s central bank left its benchmark interest rate steady, but lowered its forecast for economic growth this year based on the deeper-than-expected fall in activity in the second quarter and the extension of the lockdown over the COVID-19 pandemic during the first half of August.

The National Bank of Kazakhstan (NBK) kept its base rate at 9.0 percent but has lowered the rate by a total of 300 points this year following cuts in April and in July. But in net terms the rate has only been cut 25 basis points this year as the rate was raised by 275 basis points in am emergency move in March to protect the tenge.

In its statement, NBK said the current base rate will allow it to control inflation and ensure a smooth deceleration toward its target in the medium term.

Inflation in Kazakhstan eased to 7.0 percent in August from 7.1 percent in July, with consumer prices pushed up by higher food costs and is expected to accelerate to 8.0 percent, closer to the lower limit of the previous forecast of between 8.0 and 8.5 percent, the bank said.

It added the pass-through from a depreciation of the tenge’s exchange rate was offset by suppressed consumer demand for non-food products and a slowdown in the price of gasoline and diesel prices.

The tenge plunged 15 percent against the U.S. dollar in March but then rebounded in April as oil prices bottomed and began to rise. But since early June the tenge has been falling and was trading at 424 to the dollar today, down 10 percent since the start of 2020.

Weakly-anchored inflation expectations, higher volatility in financial markets amid “growing sanctions rhetoric against Russia”, an expected slow recovery of demand for oil and any further fiscal or quasi-fiscal stimulus present risks of higher inflation, the bank said.

But disinflationary pressures come from lower economic activity, a slowdown in consumer demand and the expected decline in global food prices will limit inflation, NBK said, adding inflation in 2021 is expected to gradually slow and reach the the upper limit of its target band of 4.0 to 6.0 percent by the end next year.

Kazakhstan’s economy shrank by an annual 2.9 percent at the end of July and NBK forecast a contraction for the full year of 2.0 to 2.3 percent, down from an earlier forecast of a 1.8 percent drop, noting a deeper than expected contraction in the second quarter and the extension of the lockdown for the first two weeks of August.