The National Bank of Kazakhstan won't lower the base rate yet: reasons behind its unwavering policy stance remain firm for now.
If people and businesses are confident that prices will rise quickly, they preemptively increase salaries and raise prices on goods and services. This creates a spiraling effect where inflation fuels itself. In such conditions, a decrease in the base rate will have serious consequences, believes the head of the National Bank, Timur Suleimenov, as reported by a correspondent from inbusiness.kz.
Inflation – A Key Issue
The response notes that since the main objective of the National Bank is price stability and a sustainable financial system, inflation remains a key issue because it directly affects people's living standards. When prices rise rapidly and unpredictably, the purchasing power of the population declines, businesses face uncertainty, and the economy becomes less stable.
The expert provided official data indicating that inflation was 8.6% in December 2024. By the end of January 2025, it had increased to 8.9%. However, the population perceives it more acutely: according to survey results, in December 2024, citizens felt a price increase of 13.2%. Moreover, they expect inflation to reach 14.6% in a year. Inflation expectations are a crucial factor influencing the economy.
"If the rate is lower than inflation and the expectations of citizens, businesses, and financial organizations, tenge deposits, currently amounting to 32 trillion tenge (out of a total deposit portfolio of 41.3 trillion tenge), will significantly decrease due to their diminished attractiveness from low deposit rates. People will start to consume goods and services at an accelerated pace in anticipation of further price increases," Suleimenov noted.
According to the expert, there will also be an increase in the transfer of funds to foreign currency assets, an outflow of deposits from the banking system, a rise in cash money, and a rush to buy durable consumer goods due to rising price and exchange rate expectations, including real estate. The influx of funds into the real estate market will undoubtedly drive up prices, effectively nullifying all government efforts to enhance housing accessibility and devaluing state housing programs. In turn, increased imports resulting from consumer activity will pressure the currency market, as the majority of consumer goods (appliances, phones, etc.) are imported. A weakening exchange rate and an increase in foreign currency deposits will undermine the long-term trend of decreasing dollarization and lead to a currency crisis, during which a return to previous peaks of dollarization in deposits cannot be ruled out.
"The weakening of the national currency and rising inflation will severely impact the well-being of citizens. Those without savings, who live paycheck to paycheck, will be the first to suffer. For businesses, this will also create challenges: high inflation makes calculations unpredictable, complicates investment and procurement planning," the head of the National Bank explained.
The Relationship Between Rate and Lending Levels
Suleimenov also emphasized that for second-tier banks, in the context of decreasing tenge deposits, which serve as sources for funding and lending, loan rates will not decrease; rather, they are likely to increase. This will create a counterproductive effect. Given the current inflation rate (8.9%) and heightened inflation expectations (14.6%), along with inconsistent monetary policy, a base rate of 10-12% will not lead to a reduction in market rates. This is because second-tier banks will not issue loans at rates lower than the expected inflation rate. All of this will exert a dominant influence on interest rates, preventing their reduction even when the base rate decreases.
"At the same time, it is important to note that the base rate is not the only factor determining the cost of banking products. Besides expected inflation and funding costs, they also take into account credit risks and operational expenses. As a result, due to financial organizations' limitations on lending to the economy, even greater and continuous government involvement and a significant increase in budget expenditures will be required," the chairman reported.
Furthermore, when discussing current trends in business lending, corporate loans are showing significant growth. In November 2024, the volume of corporate loans to the economy increased by 20.6%, reaching 18.8 trillion tenge, which significantly exceeds the growth rate of nominal and real GDP (according to operational data, 4.8% in real terms in 2024). It is also important to understand that a decrease in the rate does not automatically lead to an increase in investments. Businesses invest not because loans are cheap, but because they see stability in the market and macroeconomic conditions, as well as solvable demand. The primary source of financing for investments in fixed capital in Kazakhstan has always been and remains the enterprises' own funds, which accounted for 60-70% of the total investment volume over the past 10 years (2014-2023). Bank loans, on average, accounted for 3-7% of the total investment volume during the same period. In 2023, the profits of large and medium-sized enterprises amounted to 14.8 trillion tenge, and for the first nine months of 2024, it was 11.1 trillion tenge, confirming the presence of funds for investment.
Suleimenov explained the potential consequences of lowering the rate to stimulate lending and economic growth, as suggested by deputies. As an example, he cited Turkey, where in 2021, despite rising inflation, the decision was made to lower the key rate to accelerate economic growth. As a result, inflation surged from 14.6% in December 2020 to 85.5% in October 2022 (44.4% in December 2024), the national currency's exchange rate plummeted by more than 70%, and prices for goods skyrocketed to record levels. Moreover, from 2022 to 2024, the depreciation of the Turkish lira amounted to 165.7%. Against this backdrop, people lost trust in the financial system. In response, in 2023, the Central Bank of Turkey was forced to change course, beginning a sharp increase in the rate – from 8.5% in February 2023 to 50% in March 2024. The consequences of inconsistent monetary policy continue to have a negative impact, manifested in high inflation expectations, reduced employment, and decreased production. As a result, the Turkish economy still faces serious inflationary risks. Inflation in January 2025 was 42%, necessitating prolonged and even stricter monetary policy.
Decisiveness of Actions
According to Suleimenov, the National Bank of Kazakhstan has avoided similar mistakes. Tough but timely measures allowed inflation to decrease from 21.3% in February 2023 to 8.6% in December 2024. Thanks to a consistent policy, the situation has been kept under control. Currently, in the context of massive fiscal stimulus (record withdrawals from the National Fund totaling around 6.3 trillion tenge), substantial growth in the money supply (annual growth of 19.2% in December 2024, reaching 45.7 trillion tenge), ongoing tariff reform, and other inflationary factors, the base rate plays an important role in maintaining inflation at current levels.
"At the same time, our econometric models demonstrate that without moderate rigidity in monetary policy, the level of inflation would be significantly higher. The National Bank is fully aware of its role, powers, and responsibilities, and will continue its work to reduce inflation to the target level of 5% and ensure price stability," the chairman emphasized.
The response notes that the consistency of monetary policy is a key factor for trust in the domestic financial system and national currency. Deviations from it pose risks to macroeconomic stability and the socio-economic situation in the country. Achieving low and stable inflation is the primary role of the National Bank in creating favorable investment conditions and ensuring economic growth. As the manager of the Unified National Pension Fund (ENPF) and the National Fund, the National Bank actively invests in the domestic economy. The volume of investments in domestic assets from the funds amounted to 16.3 trillion tenge.
"Price stability requires balanced decisions based on the analysis of key macroeconomic indicators. The level of inflation, inflation expectations, the dynamics of the money supply, the state of the balance of payments, and fiscal policy – all these factors determine our decisions regarding the base rate. The consistent implementation of a moderately tight monetary policy has more than halved inflation – from a peak of 21.3% in February 2023 to 8.9% in January 2025. Without decisive actions, inflation would have remained significantly higher," the head of the National Bank explained.
According to Suleimenov, the current configuration of factors, including external uncertainty, indicates the need for continued maintenance of moderately tight conditions, and premature rate cuts amid significant price pressures will only accelerate inflationary processes, intensify dollarization, and devalue citizens' savings. The National Bank will continue its consistent monetary policy aimed at ensuring price stability and achieving the inflation target of 5%.
It was previously reported that inflation and other factors could freeze the reduction of the base rate. However, analysts believe it can still continue. The National Bank of Kazakhstan plans a gradual reduction of the base rate.