On February 20, the National Bank of Kazakhstan decided to reduce the base rate to 11% with a corridor of +/-1%, announced the Chairman of the National Bank of Kazakhstan Daniyar Akishev. Thus, according to him, the rates on liquidity provision operations are now 12%, and on liquidity withdrawal operations – 10%. Bankers received this news positively, although other analysts warn that the risks of high inflation still remain.
Akishev explained that the decision took into account the positive impact of external factors: "This is the steady achievement of world oil prices at a level above $50 per barrel, improvement in the outlook for global economic development, and a moderate inflationary background in trading partner countries."
"Among the internal factors, it is worth noting the significant slowdown in inflation, the reduction in inflationary and devaluation expectations of the public, and the ongoing dedollarization of bank deposits," reported the head of the NB RK.
According to him, subsequent decisions on the base rate will depend on the further dynamics of the fundamental factors of domestic demand and the stability of the situation in the financial sector. "In our assessment, the new level of the base rate reflects a long-term balance between achieving inflation targets and ensuring financial stability," said Akishev. "The next decision on the base rate will be announced on April 10, 2017, at 17:00 Astana time."
Representatives of the banking community received this news positively, considering the rate cut to be a timely and correct decision. At the same time, many expected a more gradual reduction in the rate by 0.5% over several months.
"Overall, I view the NB RK's decision to cut the rate positively. According to the regulator, all the necessary prerequisites were in place for this: inflation within the target corridor of 6–8%, positive dynamics in deposit dedollarization, positive signals in leading indicators. External fundamental factors also remain positive. At the same time, I expected that the decision of February 20 would result in a more gradual reduction in the rate," commented the deputy chairman of the board of JSC "People's Bank of Kazakhstan" Ertai Salimov.
According to Ertai Salimov, the base rate primarily affects money market instruments, i.e., the rates for attracting and placing funds in tenge for a short period of up to a year. The effect on long-term funding will be limited and depends on many factors.
"JSC "ATF Bank" positively assesses the NB RK's decision to reduce the base rate. We believe that given the current situation in international and domestic financial markets, stable fundamental factors of internal demand, this is a timely and correct decision that will have a positive effect on the country's economy as a whole," the bank's press service reports.
According to the chairman of the board of JSC "Nurbank" Eldar Sarsenov, this decision was made by the National Bank with a slight reserve in connection with the positive stabilization of oil prices, reduction of inflation, and strengthening of the Russian ruble.
"Keeping a high rate for attracting resources in the long term can lead to serious negative processes in the economy that will be difficult to correct in the long term. For example, most market participants will be interested in accumulating funds in BWS deposits and receiving a fixed percentage rather than investing in the real economy. In our view, if positive trends for this decision have emerged, why not take the risk and implement the procedure now, rather than waiting for actual indicators to appear and making decisions (losing time)," comments "K" Eldar Sarsenov.
At the same time, bankers promise to lower loan rates in connection with the decrease in the cost of funding in the money market.
"The softening of the National Bank's monetary policy should set a trend for lowering rates on loans for SMEs, considering the terms of lending and the quality of the loan portfolio. We have observed this trend since the introduction of the base rate," says Ertai Salimov.
"We believe that this decision will positively affect the lending rates from BWS. At the same time, it should be noted that each BWS independently determines the interest spread depending on the internal policy, strategy, and target benchmarks. At the same time, considering the factor of high competition in the banking sector, the lowering of lending rates by individual market participants will lead to their consistent reduction by all market participants, which, in turn, will have a positive effect on SME lending in Kazakhstan," comments the ATF Bank press service.
According to the analyst of the Finam Group of Companies Bogdan Zvarych, the regulator's rate cut will have a stimulating effect on the economy. As a result, banks will reduce the cost of funding, enabling them to offer the economy loans at lower rates.
"It should be noted that this will also affect deposit rates, which will decrease following the key rate. As for the regulator's further actions, in my opinion, it will take a wait-and-see position at upcoming meetings, allowing it to assess the impact of the rate cut on the economy. If positive trends and restrained inflation persist, I do not rule out a further rate cut in the middle of this year," says the expert.
Representatives of the banking community expect another rate cut – to 10–10.5% – during 2017 with positive developments of internal and external factors.
"The annual inflation rate in January 2017 was 7.9%, and in case of further reduction of inflation in Kazakhstan to the lower corridor (6%), an increase in oil prices above 55 US dollars, and strengthening of the Russian ruble, the likelihood of reducing the base rate increases. In our opinion, the base rate in 2017 cannot be at the level of inflation or below inflation in Kazakhstan. We have expectations that inflation in 2017 will be lower than in 2016, and the base rate in 2017 will likely be at the level of 10-10.5% per annum," says Eldar Sarsenov.
However, some experts were more critical of the National Bank's decision. As analysts of Halyk Finance Murad Temirkhanov and Asan Kurmanbekov write in their review, the reduction of the base rate to 11% was quite unexpected in light of the tougher rhetoric regarding further steps on the rate, voiced during previous rate cuts in October and November 2016, when the rate cut step was reduced from 1 percentage point earlier to 0.5 percentage points.
According to them, despite significantly reduced household incomes and suppressed lending to the economy, there was a sharp acceleration in inflation in November and December 2016. As a result, the annual inflation rate exceeded the NB RK's inflation target of 6–8% and amounted to 8.5% at the end of the year. In January, inflation was 7.9% year-on-year, returning to the NB RK's target corridor of 6–8% after the base effect was exhausted.
"We believe that the risks of accelerating inflation persist. In particular, in the fuel market, in the area of tariffs of natural monopolies, in the prices of industrial products, and so on. Considering that one third of imports come from Russia, the depreciation of the tenge exchange rate against the ruble, which occurred in the last 12 months, exerts certain pressure on inflation. No less significant influence on inflationary processes can have the allocation of an additional amount of targeted transfer (1 trillion tenge) from the National Fund within the framework of expanding budget expenditures for this year," write the analysts of Halyk Finance.
They believe that such a base rate reduction and increase in the reduction step could have been dictated by the head of state's directive to the National Bank and the government to address the problem of lack of money in the economy and high lending rates (President's Address of January 31, 2017).
"At present, the NB RK withdraws large volumes of liquidity from the banking sector (more than 3.4 trillion tenge), and a rather sharp reduction in the base rate will reduce the yield on liquidity withdrawal instruments, which will facilitate the growth of commercial lending to both individuals and legal entities. This, in turn, will exert additional pressure on inflation. We believe that after such an unexpected base rate cut, it would be helpful to take a pause for at least six months to assess the impact of interest rates on the economy," recommend the experts.