Framework and purpose of monetary policy

Monetary policy is a set of measures aimed at regulating the value of money in the economy to ensure price stability. Achieving a stable level of inflation in the medium term is a fundamental factor in maintaining the purchasing power of money and the well-being of society.

Since 2015, the National Bank has implemented monetary policy within the inflation targeting framework with a floating tenge exchange rate. The ultimate objective of this is to ensure price stability.

Starting from 2023, the monetary policy is targeted is to maintain annual inflation near 5% in the medium term, in accordance with the Monetary Policy Strategy 2030.

Why was the inflation targeting regime chosen?

The choice of this monetary policy regime by many major central banks is driven by the need to create the conditions for economic stability through stable and low inflation. Unstable and high inflation leads to the depreciation of savings, reduced incentives for investment, capital run to foreign assets. It also makes long-term planning impossible and impedes economic growth.

Price stability, on the other hand, allows for maintaining well-being of citizens, reducing uncertainty, and increasing the confidence of economic agents in regard to the future. It provides households and businesses with the ability to make decisions about saving and investing, creating conditions for economic stability.

One of the advantages of the inflation targeting framework is clear identification of the objectives and priorities of monetary policy. The inflation target is comprehensible for the population and businesses.

Another important advantage is adaptability to shocks. The inflation targeting framework allows a central bank to respond more quickly to economic shocks and adjust monetary policy to maintain stability.

Inflation targeting implies independence of the central bank, which ensures stability, focus, and consistency of monetary policy. At the same time, independence increases the accountability of the central bank to the public. In this regard, clarity and the transparency of the regulator’s decisions play an important role in conducting monetary policy.

Due to transparency, the framework allows the public to monitor the direction of monetary policy, thereby potentially increasing credibility of the central bank. This contributes to anchoring inflation expectations among the population and fostering economically favorable attitude within society.

When implementing inflation targeting, why floating exchange rate

A floating exchange rate of tenge allows for an ‘automatic’ response to external shocks, and in the short term, this can quickly reach an equilibrium value after shift of the fundamental factors. This approach optimally contributes to the stable development of all sectors of the economy and segments of the financial market.

The National Bank is committed to not interfering the exchange rate formation process and still retains the right to intervene to prevent excessive volatility of tenge and to ensure stability of the financial system. In general, these foreign exchange interventions do not contradict the policy of a floating exchange rate.

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