As y-o-y inflation slows, NBK cuts the base rate to 16%

KAZAKHSTAN - In Brief 06 Oct 2023 by Evgeny Gavrilenkov

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On October 6, the National Bank of Kazakhstan cut its base rate from 16.5% to 16.0%. This move looks quite cautious but justified. On the one hand, from April to September, average monthly inflation remained at 0.6% m-o-m, implying that the annualized 6M moving average inflation fell to 7.4%. Therefore, the 16% base rate may look too high. Having referred to 11.8% y-o-y inflation, the NBK implicitly hinted that inflation could accelerate—as happened in 2022 for several reasons. Massively increased budgetary spending was one of them. Tenge volatility was another one, as inflation accelerated amid a one-off tenge depreciation in March 2022. A passthrough effect caused domestic prices to rise, and they didn’t fall after the tenge bounced back. On the other hand, inflation moderated this year on the back of steady nominal appreciation of the tenge in the summer months. Note that the tenge appreciated amid a widening current account deficit. The Kazakh currency appeared over-appreciated as a result—both in nominal and real terms. Even though since August, the tenge climbed from about USD/KZT440 closer to USD/KZT480, this correction seems insufficient to bring the tenge closer to an equilibrium—especially amid global appreciation of the dollar and declining oil prices. In 1H23, the Kazakh current account deficit reached $4.759 bn ($3.252 bn in 2Q23), and in 2023 as a whole, it may widen to around $10.0 bn and be close to the historical record ($10.960 bn in 2022). Therefore, a weaker tenge would look more natural compared to its current level. If the tenge keeps weakening, then the risk of an acceleration of inflation cannot be ruled out—not least because budgetary policy wi...