Kazakhstan holds rate but doesn't exclude further cuts

     Kazakhstan’s central bank left is base rate steady for the second time after slashing it at an extraordinary meeting in early April, and said a further easing of monetary conditions was not excluded if uncertainty over key external trends, such as the price of oil, commodity prices and the world economy, continues to ease.
     The National Bank of Kazakhstan (NBK) maintained its base rate at 9.50 percent after cutting it by 250 basis points at an extraordinary policy meeting on April 3. At the regular policy meeting on April 27 the rate was then kept steady.
    The rate cut in early April followed an emergency rate hike of 275 points on March 10 to limit inflation from a fall in the value of the tenge so the net change in its rate this year amounts to an increase of 25 points.
     Although the impact of the COVID-19 pandemic continues to have a negative impact on Kazakhstan’s economy, NBK said oil and financial markets were improving and the consumption of oil was beginning to rise gradually amid signs of an economic recovery in China and the easing of quarantines in some European countries and the U.S.
     Measures to prevent the spread of the virus in Kazakhstan are also being gradually eased and while there has been a slight recovery in business activity in May from April, demand remains depressed, investment activity is slowing and economic activity is still negatively impacted.
     NBK estimated Kazakhstan’s gross domestic product would shrink 1.8 percent this year due to the negative impact of lower domestic demand and exports, even with fiscal stimulus.
     But the central bank also said it expects investment activity to recover as domestic and external demand improves along with higher prices in global commodity markets.
    Kazakhstan relies on oil for some 75 percent of its exports and the central bank noted the agreement by Opec + to extend the oil production cuts by 9.7 million barrels per day until the end of July 2020.
    The tenge has been on a roller coaster ride this year, plunging 15 percent against the U.S. dollar from March 1 to April 4 in response to the fall in oil prices and the pandemic.
    But since the rate cut in early April, the tenge has bounced back and risen 13 percent since its low on April 4 to 397.3 today. The tenge firmed further in the wake of today’s policy decision and is now 4.1 percent below its level at the start of the year.
    Despite the rise in oil prices since the collapse in mid-April and reduced imports, the central bank expects a significant deterioration in its current account this year due to lower prices and production of oil and metals along with a decrease in global demand for its products due to the global economic slowdown.
     The central bank said a widening of the current account deficit would result in “significant pressures on the tenge exchange rate.”
     Inflation in Kazakhstan accelerated in the first few months of this year to 6.8 percent in April but eased to 6.7 percent in May, above NBK’s target range for 2020 and 2021 of 4-6 percent.
     The main reason for the rise in inflation was due to higher prices for food, which rose an annual 10.7 percent in May, the highest rise since October 2016.
      Based on an upward revision of its forecast for oil prices this year to $35-$40 per barrel from an earlier forecast of $20-$25, the central bank expects inflation this year of 8.0-8.5 percent, down from the April forecast of 9-11 percent.
      It added inflationary expectations in Kazakhstan remain relatively stable at 6.0-6.2 percent for this year even if they remain weakly anchored, which could put pressure on prices in the short term.

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