The tightening of monetary policy is caused by the need to prevent the risks of nascent inflationary spiral and to return inflation to the target band of 4-6% in 2022
The Monetary Policy Committee of the National Bank of the Republic of Kazakhstan decided to set the base rate at 9.25% per annum with an interest rate band of +/– 1.00 percentage points (p.p.),press service of the National Bankinforms.
The rate on standing access operations to provide liquidity will be 10.25%, and on standing access operations to withdraw liquidity - 8.25%.
"Weighted tightening of monetary policy is caused by the need to anticipate the risks of nascent inflationary spiral and return inflation to the target band of 4-6% in 2022," the National Bank of Kazakhstan explains.
It is noted that the decision is due to the realized inflation risks from the supply side and stable pro-inflationary pressure in the economy from the demand side. Inflation is forming above forecasts, while expectations for further price increases remain high and unsecured. The rapid recovery of economic growth and dynamics of consumer activity with a significant fiscal impulse forms a pro-inflationary trend.
“At the same time, the impact of the unstable epidemiological situation in the world and, in particular, in Kazakhstan, on the restoration of business activity was taken into account. The rate increase will support the attractiveness of tenge assets, which will increase the efficiency of pricing in the foreign exchange and money markets in order to form expectations that exclude undesirable balance, ”the message says.
At the same time, such significant factors as the rise in prices for certain groups of food products amid the general global trend of increasing food prices, disruptions in supply chains, rising producer prices with increasing prices for raw materials and materials and the continuing potential for growth in regulated prices are focused on supply side.
“International experience presents that the impact of the transmission mechanism of monetary policy on supply shocks is limited, and inflation adjustment to these changes is inevitable. Based on this practice, the National Bank, with its decision, is more responsive to risks from the demand side associated with increased inflationary expectations, ”the National Bank notes.
At the end of June 2021, annual inflation amounted to 7.9% (7.2% in May 2021). Amid the realization of risks, there was an increase in all components of inflation. A significant 1.1% price increase, uncharacteristic for the summer months, in June 2021 is the highest value for this month since 2009.
Food inflation accelerated to 10.6% this June and continued to make the main contribution to headline inflation. This is due to a sharp rise in the price of vegetables, in particular, potatoes, carrots and beets. This growth is a record one and is observed not only in Kazakhstan, but also in neighboring countries (Russia, Uzbekistan, Tajikistan). The rise in food prices has been observed all over the world. Food price indexFAO (Food and Agriculture Organization of the United Nations) in June 2021 presented an increase of 33.9% in annual terms.
The non-food component of inflation accelerated to 6.9% in June 2021 amid the realization of the risks of the effect of deferred demand. The annual growth rate of gasoline prices continued to accelerate amid rising producer prices and continued recovery in demand. The recovering consumer demand also contributed to the rise in prices for clothing, footwear, cars, household appliances and furniture. Additional pro-inflationary pressure on non-food products is exerted by the rise in prices for imports in the terms of accelerating inflation in trading partner countries and rising world prices for raw materials and intermediate materials.
The annual growth in prices for paid services to the population amounted to 5.6% in June, which was associated with the rise in prices for both regulated and unregulated services. There is an annual increase in prices for air transport services, travel services (sanatoriums, holiday homes, travel abroad), personal care services and housing repair services.
The inflationary expectations of the population remain unstable. In June, the quantitative assessment for the year ahead increased and amounted to 7.3%. The share of respondents who noted a very high rise in prices over the past month reached an all-time high, rising to 59% (in May - 49%). Also, up to 87% a month earlier, the share of respondents who noted an increase in food prices rose.
The situation in the real sector of the economy continued to improve. For the first half of 2021, real GDP growth was 2.2% in annual terms. The economy is recovering amid rising global commodity prices and easing quarantine restrictions. The secondary industry, trade, construction, information and communications, and agriculture performed the stable growth in January - June 2021. The results of a survey of enterprises by the National Bank also indicate a mood improvement in the real sector. Thus, in June 2021, the business activity index increased by 0.5 points, amounting to 51.6 (in May 2021 - 51.1). The rate of decline in investment activity is slowing down. At the end of the first half of 2021, the decline in investment in fixed assets amounted to 1.8%, while in the first quarter it decreased by 9.6%.
A significant recovery in consumer activity put significant pro-inflationary pressure. In the first half of 2021, retail turnover grew by 7.6% (YoY) after falling by 1.2% (YoY) in the first quarter. In the structure of retail turnover, the turnover of non-food products is growing at an accelerated rate. The growth in household consumption is supported by positive growth in household income and a significant increase in consumer lending. The recovery in domestic demand amid fiscal stimulus is reflected in the significant increase in consumer imports. In five months of 2021, imports of consumer goods grew to USD 4.7 billion, which is 30.4% higher than the pre-epidemic level of 2019.
“Taking into account the lags in the impact of changes in the base rate on the economy and the expected finding of inflation outside the target band of 4-6% by the end of 2021, subsequent decisions of the National Bank on the base rate will be made taking into account the entry of inflation into the target band in 2022, " the NB of RK informed.
It is noted that following the results of the forecast round in September 2021, the National Bank is ready to take measures to further tighten monetary conditions in the event of an increase in pro-inflationary factors.
In the second half of 2021, further acceleration of inflation is possible against the backdrop of a seasonally low base of food inflation in July and August last year, as well as the implementation of the effect of deferred demand.
The next planned decision of the Monetary Policy Committee of the National Bank of Kazakhstan at the base rate will be announced on September 13, 2021 at 15:00 Nur-Sultan Local Time, the National Bank concluded.
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