The Limits of the Base Rate

In March 2025, it will be three years since the high base rate was introduced. On the whole, it has helped to contain inflation, keeping it at around 9%. However, it is important to understand that the impact of the base rate on inflation is limited, and at a certain level it reaches the ceiling of its effectiveness.

In Kazakhstan, the influence of the base rate is particularly limited, and I will try to explain why. The National Bank of Kazakhstan currently targets inflation at 5%, but in my view, under present conditions this goal is hardly realistic.

Kazakhstan is in an interesting position: the country is simultaneously implementing a number of reforms that pull in different directions and affect inflation in different ways.

Liberalization of tariffs and fuel and lubricant prices. This is one of the most significant reforms affecting the entire economy. Price increases in these sectors inevitably lead to inflation, since they affect the whole cost chain. However, without this measure further development would be considerably hampered, and it should have been carried out much earlier.

Tax reform. Its effect is also pro-inflationary, although one-off. Nevertheless, balanced public finances are a key factor in sustainable development, and in the long term this reform will bring more benefit than harm.

A prolonged high base rate. In the short term, a high rate reduces the money supply, curbing consumption and, accordingly, inflation. In the long term, however, interest expenses are built into the cost of goods, raising their prices. Expensive credit constrains investment and market supply, which also pushes prices up. As a result, only an expansion of supply can stabilize inflation, whereas imports are not a full-fledged solution. Keeping interest rates high for long periods, at a time when the economy needs to grow, calls for a more balanced and carefully considered approach.

The Balassa-Samuelson effect. In developing countries such as Kazakhstan, there is a structural driver of inflation linked to faster labor productivity growth in tradable sectors. This stems from a lower starting base, technology and investment. Productivity growth makes it possible to displace imports and increase exports, which raises the incomes of workers in these sectors. But then a natural process follows: people with higher incomes begin to spend them domestically, which creates heightened demand in non-tradable sectors. As a result, prices for services (for example, hairdressers, fitness centers, housing, education, restaurants) rise faster than in developed countries. This leads to general inflation, even if prices in tradable sectors are relatively stable. In Kazakhstan this effect has been observed for a long time: rising incomes in export industries push up the cost of services, real estate and other non-tradable goods and services. This is a fundamental factor that cannot be neutralized by monetary policy alone.

Low rates of labor productivity growth. In developing countries they are lower than in developed ones, which creates additional difficulties. Seeking to support national producers, the state often pursues a weak-currency policy. In Kazakhstan this is expressed, for example, in the sterilization of foreign currency revenue from certain highly productive industries (in our case, through the National Fund). As a result, imports become more expensive, which further fuels inflation, but domestic goods become more competitive. This is global practice for protecting against Dutch disease and supporting the non-resource sector.

Thus, inflation in developing countries is always higher than in developed ones. While developed economies target it at 2%, which supports economic growth, for developing countries the optimal level of inflation lies in the range of 5–10%, depending on the stage of development. In our conditions, targeting inflation at 5% is premature; a range of 9–10% seems more realistic.

At the same time, in my opinion, the current effect of the high base rate has already been exhausted. Meanwhile, banks continue to earn enormous income thanks to the high rates paid on liquidity held in current accounts. In 2024, they earned about KZT 1 trillion from this alone.

A comprehensive transformation of monetary policy is needed, since its current structure creates serious imbalances. In particular, the cost of servicing public debt is rising and the need for state support for business is growing, which creates additional risks for the budget and the economy as a whole. I think it would be logical for the expert community to discuss the state's economic policy more broadly.

In addition: I will post a chart showing the gap between cumulative inflation in Kazakhstan and the US, as well as the dynamics of the tenge's depreciation against the dollar. There is one interesting point: over a long period the difference between these indicators is 65%, although in an ideal economy they should be equal. Could this be an error in the inflation calculations? If official inflation is correct, the tenge exchange rate should be stronger. Or else inflation was calculated incorrectly in some years.