NUR-SULTAN / ex ASTANA (NBK press service) — The Monetary Policy Committee of the National Bank of the Republic of Kazakhstan has decided to set the base rate at 9.00% per annum with an interest rate band of +/- .0 p.p. Accordingly, the rate on permanent access operations for liquidity provision will be 10.00% and on permanent access operations for liquidity withdrawal – 8.00%.

According to the National Banlk of Kazakhstan (NBK), the decision has been taken taking into account the balance of inflation risks in the short and medium term. The external inflationary pressure caused by the growth of world food prices and acceleration of inflation in the countries — main trade partners of Kazakhstan is still observed. In the domestic economy, the process of gradual recovery of business activity and consumer demand continues.

The main risks of inflation in Kazakhstan in the medium term are associated with stronger fiscal stimulus to the economy, further growth of domestic prices for fuels and lubricants, higher food inflation as a result of increasing prices on world markets and the emergence of imbalances in the domestic food market, as well as the winding down of incentives by central banks of developed countries.

At the end of May 2021, annual inflation stood at 7.2%. Rising prices for non-food items and paid services were partly offset by dis-inflationary processes in the food market.

Food inflation continued to slow down, reaching 9.3% in May 2021 (9.8% in April 2021). The current deceleration is linked to the exit from the high inflation base of 2020. At the same time, there is a continuing upward price trend on individual commodity markets. An additional pro-inflationary pressure is exerted by the ongoing 12-month rise in global food prices. In May 2021 there was a sharp increase in the FAO food price index — the value was 127.1 points (up 39.7%, y/y), due to a jump in the prices of vegetable oils, sugar and cereals with a moderate increase in the prices of meat and dairy products.

Non-food component of inflation accelerated to 6.7% in May 2021 (6.4% in April 2021) due to growing prices of fuels and lubricants, clothing and footwear. Increase in prices for fuels and lubricants is related to growth of producer prices, recovery of economic activity and deferred effect of excise tax rate change in 2020.

The annual increase in prices for paid services to the population as of May 2021 amounted to 5.1% (4.1% in April 2021). There has been an increase in the prices of utilities (electricity, waste removal) and passenger transport services. At the same time, in April-May 2021 there was an increase in prices for some unregulated services on the background of increased demand amid easing of quarantine restrictions and mass vaccination of the population.

Inflation expectations of the population decreased as a result of decreased uncertainty in respondents’ answers against the background of improved economic situation and mass vaccination. In May 2021 the quantitative inflation estimate for the year ahead was 6.6% (7.2% in April 2021). The share of respondents expecting the current price growth to continue over the next 12 months has increased to 42% (26% in April 2021).

According to estimates of the NBK, a slowdown in inflation could result in exceeding the target corridor of 4-6% at year-end 2021. The main factors for revision of inflation forecast were growth of prices for fuels and lubricants at the end of 5 months in 2021, increase of tariffs of energy producing organizations, as well as maintenance of external inflationary pressure. At the same time, the impact of the additional fiscal impulse associated with the clarification of the national budget will be redistributed between 2021 and 2022. Against the background of unanchored inflation expectations, we note the high probability of secondary inflation effects from short-term pro-inflationary factors. This could eventually lead to a longer period of inflation deceleration into the target range.

In 2022, the effects of the above-mentioned internal environment factors and the easing of external inflation pressures are projected to be exhausted. Inflation in China and the EU is expected to fall short of their target levels and inflation in Russia is expected to stabilise at 4%, with a gradual decline in global food prices. Given the high share of food and non-food imports from major trading partner countries, the gradual stabilisation of inflation in these countries will help slow down inflation in Kazakhstan and enter the target range of 4-6%.

NBK believes gradual improvement of the situation in the real economy continues. In January-April 2021, GDP growth amounted to 0.7% in annual terms. There is a recovery in trade (growth of 5.7%) and transport (a slowdown to -9.0%). Growth acceleration is noted in manufacturing (7.7%), construction (12.5%) and information and communication (11.1%).

There is a recovery of consumer activity of the population. This is confirmed by the accelerating dynamics of retail turnover in January-April 2021, which has entered the growth area (6.2%, YoY) for the first time since March 2020. Household consumption growth in the first quarter of 2021 was supported by a 3.4% increase in real per capita income as a result of higher wages for employees and budget expenditure on pensions and grants.