The Statement of Governor E. Dossaev
on the base rate of the National Bank
February 3, 2020, Almaty
Dear representatives of the media community!
Today the National Bank has decided to maintain the base rate at 9.25% per annum and the interest rate corridor of +/- 1 percentage points. Given the National Bank’s mandate to ensure the price stability, the decision will help keeping inflation within the target range.
In considering this decision, the following factors were taken into account: the inflation dynamics, its accordance with our expectations, updated inflation estimates for 2020 as well as a situation in the domestic economy, in foreign markets and in the countries – main trade partners.
In general, the trends of the end of the last year had been positive. In the fourth quarter, the economic growth in the country accelerated. The rise in the world oil prices happened to be the main tendency in external markets.
As a result, the real GDP growth in 2019, according to preliminary data, amounted to 4.5%. The short-term economic indicator which characterizes the dynamics of 6 basic industries grew by 5.0% in annual terms. Its growth was accompanied by the increased output in the industry (3.8%), construction (12.9%), trade (7.6%) and transportation (5.1%).
Investments in fixed assets went up by 8.5%. Large investment projects were being implemented in the industry, transportation; volumes of construction works and residential construction increased.
Let me cover the rationale behind the decision and the risks of achieving the inflation targets.
FIRST, inflation continues to remain within the target range of 4-6%.
In January of the current year, the annual inflation rate was 5.6%, having increased from 5.4% in last December amid accelerating growth in prices of non-food items and paid services. Inflation trends are under the pressure of prices of gasoline and regulated services.
Annual non-food inflation amounted to 5.2% as compared to 5.0% in the previous month amid the 2.7% increase in price of gasoline this January (because of the raised excise taxes). Tariffs for paid services rose by 1.4% in annual terms (0.7% in December 2019). In January of the current year, the price of services of urban public transportation increased by 2.9%, and electric energy prices have risen by 1.0%.
This January the food price growth slowed down to 9.2% in annual terms as compared to 9.6% in last December owing to the declining annual price growth rates of meat, fish, oils and fats. Thus, the effect of the increase in prices of these food items on inflation which we observed last year is gradually weakening and we anticipate the slowdown in the food inflation in 2020.
SECOND, household inflation expectations remain moderate and are forming close to the actual inflation level.
In December 2019 the quantitative assessment of inflation expectations for a year ahead declined to 5.6% (in November – 5.8%). The share of respondents expecting inflation to persist or slowdown over the next 12 months has nearly changed amounting to 54.1% (in November – 54.7%).
Household surveys show that 84% of respondents are more perceptible to the growth of food prices as compared to non-food products or services. As the downward trend in the food price growth which has outlined in the recent months intensifies, inflation expectations will be also subsiding.
THIRD, a persisting pro-inflationary pressure from the consumer demand.
According to the results of nine months of 2019, the household consumer spending grew by 6.0%, which is explained by the increase in household real disposable income and by the growth of consumer lending.
Household real disposable income according to results of January-November 2019 went up by 5.8% due to the increase in real wages and expanding state social support of the population. So, in the fourth quarter of 2019, real wages went up by 9.9% in annual terms. Last year, the growth of budget spending on social support made up 26.0%.
An additional consumer demand is provided by loans. According to results of 2019, the growth of the bank consumer loan portfolio amounted to 26.9%. This segment of lending is growing faster than other segments.
Last year, a set of regulatory measures has been undertaken. Bank capital requirements had been increased, the charging of penalties and fees in case when a loan is past due over 90 days had been prohibited, and loans to individuals whose income is below the minimum subsistence level had been prohibited.
We believe that the undertaken measures will enable to make the lending market development well-balanced, thus, among other things, reducing an excessive pressure on the consumer demand and inflation in general.
FOURTH, the increasing uncertainty regarding the future trend of external factors.
The beginning of the current year has been characterized by the increasing uncertainty in the global economy. This is related to aggravation of geopolitical tensions in the Middle East, risks of lessening of economic relations by a number of countries with China as a result of the outbreak of coronavirus which was declared by the WHO as a global public health emergency.
During January 2020, the oil market showed high price volatility – from 58 to nearly 69 US Dollars per barrel, being primarily influenced by negative media coverage. Prices have been changing as a result of an escalation between the USA and Iran, information about an active transmission of a new virus in China as well as of the data release about the growth of US oil reserves. Consequently, over the month the average Brent oil price declined as compared to December prices to 63.7 US Dollars per barrel (65.3 US Dollars per barrel in December 2019). As of February 3 of the current year, it fell to 56.04 US Dollars per barrel.
Nonetheless, according to estimates of the majority of international experts, in 2020-2021 world oil prices will be near or slightly above 60 US Dollars per barrel (64.2 US Dollars per barrel on average in 2019).
The National Bank is closely monitoring the situation in the global economy and assessing its impact on the internal processes. Where necessary, measures will be undertaken to minimize possible negative implications.
A progress in trade disputes between the USA and China is a positive factor. On January 31 of the current year, Great Britain exited the European Union; this makes for greater clarity in their future relationship. As a consequence, the global GDP is expected to accelerate its growth in 2020-2022 (from +0.1 percentage points according to the World Bank estimate to +0.4 percentage points according to the IMF estimate), which is definitely a positive factor for Kazakhstan.
In this context, since the beginning of the year the tenge has appreciated by 0.5% to KZT 380.55 per US Dollar (at end-2019 – KZT 382.6 per US Dollar), limiting the exchange rate pass-through to inflation.
FIFTH, the inflation background in external markets and in the economies is of a divergent nature.
The price growth in external food markets persists. The FAO Price Index has been growing for the third month in a row. In December 2019, it grew by 2.5%. Such growth was driven by the rise in price of vegetable oils, sugar and dairy products.
The external pro-inflationary background is supported by a continuing growth of inflation in China, which has been forming above the target set by the central bank. If in 2018 inflation accounted for 1.9%, in December 2019 it reached 4.5% while the target was 3%.
A favorable factor for inflationary processes in Kazakhstan includes the trend for reducing inflation in Russia to 3% at year-end 2019 and a persistently moderate price growth at the level of 1.6% in the EU countries. This factor will be limiting the growth in prices of imported goods and, therefore, will be having a restraining effect on the dynamics of food inflation in Kazakhstan.
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Taking into account the impact of the above factors, the National Bank leaves the monetary conditions unchanged.
On the short-term horizon, pro-inflationary risks are expected to dominate. First of all, this is related to the increase in excise taxes for wholesale and retail sale of gasoline at the beginning of the current year and also to the exhaustion of the effect on the annual inflation caused by reduction of tariffs for regulated services in January-February of the last year.
Other key inflation factors include a persisting relatively high domestic demand and continuing growth of world food prices. However, in our opinion, their impact on the inflation will be gradually weakening.
Nonetheless, the National Bank will continue to closely monitor the price dynamics of goods which made the main contribution to inflation in 2019.
Our task is to bring inflation down closer to the lower boundary of the target range of 4-6% by the end of 2020. We expect that the Government and local executive authorities will strengthen their measures aimed, in the first instance, to boost competition in food markets and to implement an optimal tariff policy for regulated services. This should create prerequisites for easing of monetary conditions and maintaining the base rate neutral at the level of 3-3.5% in real terms.
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The next decision on the base rate will be announced on March 16, 2020 at 3.00 PM Nur-Sultan time and will be based on results of the latest forecasting round. We will present the updated forecasts of key macroeconomic indicators including the inflation dynamics on the forecast horizon up to the end of 2021.
Thank you for your attention!