The National Bank of Kazakhstan responded to a request from Majilis deputies, who had previously demanded a reduction of the base rate to 10-12 percent in order to combat inflation, as reported by Tengrinews.kz.
According to the response to the deputies' inquiry, lowering the base rate would lead to serious consequences.
"If the rate falls below inflation and the expectations of citizens, businesses, and financial organizations, tenge deposits, which currently total 32.0 trillion tenge (out of a total deposit portfolio of 41.3 trillion tenge), will significantly decline due to their decreased attractiveness resulting from low deposit rates," the National Bank stated.
As noted by the National Bank, this would result in people accelerating their consumption of goods and services in anticipation of further price increases. There would be a stronger movement of funds into currency assets, a withdrawal of deposits from the banking system, an increase in cash holdings, and a rush to purchase 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 lead to price increases, which would virtually negate all government efforts to enhance housing affordability and devalue state housing programs. Additionally, the rise in imports due to consumer activity will put pressure on the currency market, as the majority of consumer goods (household appliances, phones, etc.) are imported," the National Bank explained.
The weakening of the exchange rate and the increase in foreign currency deposits will undermine the long-term trend of dollarization reduction and could lead to a currency crisis, during which a return to the previous peak of dollarization of deposits (70 percent in January 2016) cannot be ruled out.
"The depreciation of the national currency and rising inflation will severely impact the welfare of citizens. Those without savings and living paycheck to paycheck will be the first to suffer. For businesses, this will also create challenges: high inflation makes calculations unpredictable, complicating investment and procurement planning," the National Bank added.
As a reminder, on January 17, the National Bank of Kazakhstan made another decision regarding the base rate. It remains at the previous level of 15.25 percent per annum with a corridor of +/-1 percentage point.
