Keynote of NBK Deputy Governor Akylzhan Baimagambetov Concerning Base Rate Decision

About reasons to retain the base rate after three consecutive hikes

Indeed, we witness a slowdown, and so far, I would carefully underline, it is a temporary stabilization of stable components of inflation. I will refer to our estimates as a confirmation. Consumer price inflation cleared of seasonality slowed down to 5.6% this November. The same indicator in the middle of the year exceeded 16%. It is very important what will happen next - whether a trend for a further decrease in inflation will be shaped or not. If this is still a temporary phenomenon, and not a trend, we will respond accordingly.

In this connection, it is necessary to mention a new coronavirus strain and uncertainty associated with it. As we can see, some countries are already introducing restrictive measures, up to lockdowns and restrictions on passenger traffic. Such actions, if pervasive, carry risks in the form of slower economic growth, further disruption to production chains, and even pro-inflationary risks.

On the other hand, some experts point out that the omicron could potentially carry fewer health risks, which, in case of a positive scenario, could signal a gradual end of the pandemic.

All this uncertainty quickly carries over to financial markets and sentiment. Emerging markets are especially acutely affected by wave-like impacts of new strains.

Given this situation and not having enough information to assess effect of the new strain on future development of events, we have taken a wait-and-see position. We need a clearer understanding of how the new balance of risks will develop and how it will affect the external and internal economies. In this context, our balanced approach to making a decision on the rate, I think, is justified.

About inflation expectations and external factors that affect its formation

It is a global rise in food prices. A lot of countries worldwide still have record inflation levels. Food prices are growing due to disruption of supply chains and reduced supply because of adverse weather conditions. FAO food price index is showing growth for the fourth month in a row. This November, the index reached 134.4 points, the highest since June 2011. Thus, external food prices for the year soared by 27.3%.

Especially it is necessary to highlight growing inflation in Russia, our major trading partner or even the key trading partner in terms of imports. Inflation has reached a five-year high, accelerating to 8.1% in October 2021. This is double their target corridor. Given a high share of the Russian imports, high inflation in Russia certainly affects domestic prices. With the goods with increased prices, we also import inflation.

About inflation drivers in Kazakhstan

Rising food prices still make the main contribution to inflation within the country. We have just talked with you about high global food prices, and it is important to understand that Kazakhstan cannot be considered in isolation from the rest of the world as well as any other country. We are an open economy that actively trades with the outside world.

For some goods, production of which domestically meets the local demand, there is a difference with external prices, which creates inflationary pressures. These mainly include prices for bakery products, cereals, flour and dairy products.

The situation on the domestic market is aggravated by a decrease in the yield of grain and forage crops. According tothe Ministry of Agriculture, 16.4 million tons of grain have been thrashed for 11 months. This is 21.3% less than last year. Moreover, costs of food producers are growing due to rising prices for fuels and lubricants and electricity. All this can lead to an increase in such basic foods as bread, meat, eggs, etc.

Concurrently, recovery in economic activities and consumer demand continues. According to the National Statistics Bureau, real money income of the population rose. In addition to this, we see an improvement in consumer lending. This has a positive effect on dynamics of retail turnover.

In these conditions, inflationary expectations remain elevated. This leads to extra inflationary pressures and then to expansion of consumption.

Recovery of domestic demand and its contribution to current inflation

The reported recovery of production in industries and services, expanding imports, positive dynamics of household income, high rates of lending, easing of quarantine restrictions have a favorable effect on dynamics of the  domestic demand.

We have seen a brisk growth in real consumer spending since the beginning of the year. Currently, a high component of demand is reported in non-food segment, where post-crisis recovery and realization of pent-up demand can be seen. If we turn to dynamics of retail trade turnover in terms of non-food products, since the beginning of the year it has been actively increasing, and growth rates reach double-digit figures – 10.1% at the end of 10 months of 2021. This dynamics is supported not only by income but also by an active growth of consumer lending, which we have already mentioned. It, in turn, demonstrated a 36.6% surge this October and issue of new consumer loans soared by 86.0%.

The economy is also demonstrating a recovery in the service sector. Share of expenses for paid services has increased since the beginning of the year. Last year, they contracted amid quarantine restrictions. According to recent data, in the 2nd quarter of this year nominal expenditures of households for services increased by more than a third - by 36.2%.

According to our forecasts, dynamic growth of household consumption will continue by the end of the year and in the medium term. In the second half of this year, its volumes in real terms will reach the level of 2019. In fact, they have already achieved the pre-pandemic level. In this regard, the pressure on domestic prices from consumer demand will continue.

About GDP forecasts

I would start with the economic activities. Dynamics are developing in line with our optimistic scenario of the last forecast round, which assumed price of Brent crude at USD 70 per barrel. Given the positive on the market and forecasts of international organizations, this time we cautiously raised oil prices under the baseline scenario from USD 60 to USD 70 per barrel. Taking into account these preconditions, at the end of 2021, GDP growth is still projected in the range of 3.7-4.0%.

The main source of growth will be a recovering consumer demand, which is supported by improving real incomes of the population and consumer lending. Some increase in investments is expected. Exports will provide additional support to GDP growth due to expanding external demand and a minor growth in production of energy resources. It is necessary to indicate that export of a number of metals and products from them has grown this year. On the contrary, increasing imports can limit GDP growth due to recovery of the domestic consumer and investment activity.

And now let’s talk about what will happen next year. In 2022, the economy will expand by 3.9-4.2%. Growth will receive support from a weaker impact of the pandemic on business activity and an increase in energy production due to easing of OPEC+ restrictions.

Gradual increase in the oil production as part of the OPEC+ deal and subsequent completion of terms and conditions of the agreements next year will help expand an output of energy production. This will have a positive effect on both exports and more active investment dynamics. The growth factors will remain the same as this year.

About inflation forecasts

By the end of this year, inflationary processes are expected to slow down to 8.5-8.7%. We see that this November inflation decelerated for the first time since May this year. Prompt anti-inflationary measures taken by the Government and akimats have a positive effect. In this regard, we see a high probability that at the end of the year the goal set by the Head of State – to cut inflation down to 8.5% – is achievable.

Accelerating growth of prices for non-food products will be partially offset by slowdown in the growth of food prices.

Deceleration of the growth pace of food prices will be largely associated with the exit from calculations of the high base of 2021 and return of monthly growth rates to their historical values. Significant risks of a higher growth of food prices also remain.

The acceleration of inflationary processes among non-food products will be associated with a further increase in purchasing activity of the population and expectations of an increase in import prices given the disruption to supply chains.

Also, in the short term, a moderate rise in prices for paid services is expected. This is largely due to the preservation of current tariffs on the market for regulated housing and communal services.

Pricing of goods and services in the consumer basket will receive an additional impact from recovery of consumer activity, high inflation expectations as well as an indirect effect of the growth in prices for fuels and lubricants through the growth of the cost of goods and services.

As a result, according to our estimates, annual inflation in 2022 will gradually ease up and will be formed within 6-6.5%.

The slowdown of inflation next year may also occur more dynamically in case of effective implementation of the Anti-inflationary Response Package by the Government.

About risks of inflation deviation from forecasts

First, the risks of inflation deviating from the baseline scenario remain high. First of all, it is a risk of a sharp drop in oil prices in case of a recurrent drawdown of the global economy. This has already happened in spring 2020. This time, this may be due to introduction of restrictive measures because of an increase in the incidence of new strains of COVID-19, including Omikron strain.

Compared to the previous forecast round, risk of importing external inflation is higher. Rising energy prices and disruption of supply chains have caused significant inflationary pressures worldwide. Some analysts continue to consider these processes to be temporary but it may turn out that they will be more prolonged and may entail higher inflation.

Second, risk of drastic tightening of monetary conditions by developed countries due to increased and prolonged inflationary pressures remains high. This factor can lead to an outflow of capital from emerging markets and depreciation of their currencies. This will automatically entail further acceleration of inflation, including in Kazakhstan.

Third, due to a low wheat harvest in Kazakhstan and a possible increase in production costs amid rising prices for fuels and lubricants and electricity, risk of accelerating inflation from supply factors persists.

Finally, in the medium term, there is still a risk that inflationary expectations will not anchor amid high food inflation and strong growth in prices for non-food products and services.

About possibility of a lower base rate, despite pro-inflationary pressure, in order to stimulate economic growth

Inflationary pressure remains high, which is why it is premature to talk about an end to the cycle of tightening the monetary policy.

Our main benchmark, according to the mandate, is to ensure price stability and keep inflation within the target corridor. After all, stable low inflation  is a key of sustainable economic development. A short bet in current conditions will lead to negative consequences, which I have repeatedly spoken about earlier. The market understands that we will not agree to this, and understands the reasons why. Our communication with the market is quite transparent, responses to external and internal factors are logical in the current environment.

And now about factors. I will outline the factors that we will be especially closely monitoring in upcoming decisions on the base rate.

First, these are expected and actual inflationary trends. Anti-inflationary Response Package implemented jointly with the Government and akimats has retarded the annual growth in prices for socially significant food products. This is a rather positive moment for food inflation. However, despite the success, these are still operational measures, which, accordingly, have a temporary effect. It is important how the Government implements structural solutions to reduce non-monetary inflation in the medium term.

Second, situation in the external sector. In key commodity and food markets for Kazakhstan, there is high uncertainty amid occurrence of the new coronavirus strain. It is necessary to understand the scale and duration of its influence on the economic policy of the countries of the world, on the epidemiological situation and business activity in Kazakhstan.

Third, risks of remaining inflationary expectations at high levels. Desire to anchor them will be an argument in favor of raising the base rate.

The National Bank will continue to closely monitor the situation in the external sector and in the domestic markets. In case of threats to achieve the targets, we have all the necessary tools to ensure price stability.