Since 2015, the National Bank switched to the inflation targeting regime with a floating tenge exchange rate. Inflation targeting is a monetary policy regime under which price stability is the ultimate goal.
The important role is devoted to the interest rate channel through which the central bank's interest rate policy influences market rates with a further pass-through to the consumer, saving and investment behavior of the population and, eventually, to inflationary processes.
Why price stability?
Inflation is one of the most acute problems of modern economic development in many countries of the world. The general increase in prices leads to the depreciation of savings, the fall of incentives to invest, the decrease in confidence in the national currency. Inflation causes irreparable damage to the economy, making long-term planning impossible. Ultimately, high inflation slows economic growth.
Many years of international experience show that the most effective strategy for maintaining balanced economic development and improving the welfare of society is to ensure low inflation. Price stability is a key goal of many central banks.
Why the floating exchange rate regime?
After the transition to inflation targeting, the floating exchange rate is the current exchange rate policy regime. This regime allows to automatically respond to external shocks and in a short time after a change in fundamental factors to reach an equilibrium value, which best contributes to the stable development of all sectors of the economy and segments of the financial market.
The National Bank does not interfere in the exchange rate formation, while reserving the right to intervene in order to prevent from dramatic fluctuations of the tenge exchange rate as well as to ensure the financial system’s stability. In general, interventions do not contradict to the floating exchange rate policy and may be used by central banks to build up the country’s international reserves.