ECONOMISTS PREDICT FURTHER GRADUAL REDUCTION OF THE BASE RATE

The economic community of Kazakhstan is awaiting the results of the Monetary Policy Committee meeting of the National Bank, which will take place tomorrow. During the meeting, the experts of the financial regulator will decide on the "rules of the game" that all banks must follow in the near future - they will set the base rate.

It should be reminded that as a result of the previous meeting of the MPC, the base rate was reduced from 16.00% to the current 15.75%.

The Tenge editorial board surveyed economists to familiarize themselves with the key arguments of the expert community on this issue. The opinion of those surveyed was virtually unanimous, however, each of them focused on the aspects of the decision that they consider important.

Askar Kysykov, the director of the TALAP Center for Applied Research, believes that the National Bank will be extremely cautious regarding changes to the base rate.

According to Kysykov, current macroeconomic conditions indicate that the reduction of the base rate will continue. With inflation below 10%, and a base rate of 15.75%, the real rate is almost 6% - a very high value. Therefore, the National Bank will likely reduce the base rate, but not by much, probably by half a percent, because they are playing it safe. They operate with the concept of inflation expectations, which remain high. However, overall, if we look at inflation, the base rate should be reduced at a faster pace. It could be reduced to 12-13% to achieve a real rate of 3%, but I am confident that the National Bank will not do so and will continue to reduce the interest rate gradually.

Zarina Skripchenko, the leading analyst of the Association of Financiers of Kazakhstan, also believes that the financial regulator will not make sudden moves and will continue the gradual reduction of the BR.

According to our opinion, at the upcoming January 19 MPC meeting, a further cautious reduction of the base rate is possible against the backdrop of dynamically slowing inflation in Kazakhstan (9.8% at the end of 2023 compared to 20.3% the year before) and an improvement in the external inflationary environment. In particular, it is worth noting the decrease in global food prices (the FAO index for 2023 decreased to 124 points, 20 points lower than the average for 2022) and energy resources (the average oil price in 2023 was $82.2 per barrel compared to $99 the year before), as well as a slowdown in price growth in Kazakhstan's trading partner countries (except for Russia).

According to the latest signal from the National Bank, the reduction of the base rate will continue provided that the actual dynamics of inflation correspond to its forecasted trajectory (7.5-9.5% in 2024) and a decrease in domestic pro-inflationary risks (fiscal stimulation, stable domestic demand, unstable inflation expectations of the population).

Economist Arman Beisembaev is also confident that the base rate will be reduced slightly, but did not give a definitive forecast. Still, thanks to macroeconomic indicators, the MPC has the opportunity for more significant changes.

I see all the prerequisites for reducing the base rate by another 0.25. However, the possibility of a more significant reduction by 0.5 or even 0.75 cannot be ruled out. Inflation has become single-digit, developed countries are practically on the verge of starting a round of rate cuts. So, the National Bank definitely has a lot of room for maneuver.

Experts from Halyk Finance believe that the base rate should be reduced by 1%. Analysts expressed their opinion in a recent review.

The current indicators indicate a continuing trend of gradual inflation stabilization in the economy, facilitated by the strengthening of the national currency, dedollarization, and moderate external price dynamics. At the same time, the cautious and relatively tight anti-inflationary policy of the monetary regulator has contributed to this stable disinflationary trajectory to some extent.

The inflation forecast for the end of this year, announced by the NBK at the last decision on the base rate, has not changed and remains at 7.5-9.5%, which on average corresponds to our forecast of 8.5%.

Inflationary pressure is steadily declining both in Kazakhstan and worldwide. At the same time, the costs of geopolitical tensions not only do not subside but also spread to new regions, which hinders the normalization process of inflation. Fiscal policy in Kazakhstan still has a distinctly interventionist character, which, together with the increase in tariffs for utilities, will delay achieving a more acceptable level of inflation.

In our view, at this moment, it is very important for the country to implement a coordinated economic policy in the context of fiscal and monetary components. We cautiously hope that this year the transfers from the National Fund will not be increased again in March, similar to last year. Thus, the unexpected injection of new funds from the National Fund in the amount of T1.3 trillion at the end of last year significantly complicates the setting of the transmission mechanism of monetary policy and, in addition, will prolong the negative impact on inflation in the new year, slowing down the price growth process.

Currently, there is an expanding gap between the base rate and inflation, which reaches 6 pp. At the same time, further slowing of inflation rates will halt the growth of the real rate.

A cautious rate reduction by the regulator will allow for a gradual normalization of market interest rates without destabilizing inflation expectations. In our opinion, at the next MPC meeting, the NBK can reduce the base rate by 50-100 bp to 14.75-15.25%. Subsequently, a consistent easing of monetary policy (in the absence of additional financing of the Kazakhstan economy from the National Fund) can bring its level in real terms to 3-4%, and the size of the base rate to 12.0% by the end of this year.

Economist Zhanat Nurgaliyev is confident that the base rate will be reduced by only 25 bp. However, the expert does not exclude that the National Bank may altogether pause the trajectory of this indicator's reduction, at least at the first MPC meeting in 2024.

After the MPC meeting in November last year, the National Bank of the Republic of Kazakhstan mentioned that they would consider the appropriateness of gradually reducing the base rate, but with the preservation of moderately tight monetary and credit conditions in the medium term to return inflation to the 5% target and anchor inflation expectations. That is, definitely, one should not expect even a 1% reduction. Moreover, the statement of the National Bank mentioned that pauses in the change of the base rate are not excluded for accumulating data and monitoring the balance of risks.

It should be reminded that the analytical center of the Association of Financiers of Kazakhstan conducted a similar survey. According to its results, 94% of respondents also expressed their confidence in the reduction of the base rate.

This text was translated with the help of the artificial intelligence ChatGPT