Galim Khussainov
Inflation and the tengeBankingLending and mortgagesTaxationEconomy and public policyManagement

Banking · 2 min read

The National Bank Needs to Hold the Line on Inflation Like Stalingrad

Translated from Russian with the help of AI. Original: Russian version

The gap between the National Bank of Kazakhstan's base rate and the cap on deposit rates removes any incentive for second-tier banks to lend to the economy.

The base rate at which the National Bank of Kazakhstan (NBK) absorbs tenge liquidity from second-tier banks is 15% per annum.

The cap on deposit rates is 14% per annum. In other words, a second-tier bank can place funds with the National Bank at 15% while raising them from individuals at 14%.

Naturally, under such conditions every second-tier bank will take in as many deposits from individuals as it can at 14% per annum. There is no risk at all, and a bank can earn an extra percentage point without lifting a finger or giving it a thought.

I have noticed that almost every second-tier bank now offers deposits at 14%, and many mid-sized banks have even started paying 14% per annum on current account balances, pulling in whatever cash is out there.

And even if everyone now starts switching en masse from dollars to tenge, second-tier banks still have no reason to lend to the economy themselves, knowing that they can easily earn an extra percentage point. The only loans they will make are with government money. That is a business model that could very well take hold.

Why is the NBK doing this? It is an interesting question. I think it has to do with inflation: this is how tenge liquidity is withdrawn from the economy and, as a result, inflation is reduced. It has to be held within 8%, like Stalingrad.

It seems the decision has been made to support exporters and industry with a cheap tenge: a consistently weak national currency does make our exporters and manufacturers competitive. But it should be noted that this makes it very easy to simply import inflation, above all from Russia. And for domestic demand that has been crushed and for declining oil production, even a rate of 500 tenge to the dollar will not help.

Published in: Ratel.kz, 25 March 2016

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