On Inflation
Translated from Russian with the help of AI. Original: Russian version
With inflation above 12%, the author argues that raising rates and controlling prices will not be enough. He calls for a comprehensive plan: stop capital outflow, expand foreign-currency lending to the corporate sector, and rein in consumer lending.
That inflation would exceed 12% was largely expected, since the low-inflation months of last year have dropped out of the calculation. What worries me more is the acceleration in monthly inflation: in September it came to 1.1%, equivalent to an annualized trend of 14%. High inflation has many causes, and no single one can be singled out: high government spending, the liberalization of utility and fuel prices, consumer lending, the depreciation of the currency, the small volume of lending to the real sector, accumulated imbalances in monetary policy, and so on.
It is clear that the National Bank has no option but to raise the base rate by at least 0.5 percentage points at its next Monetary Policy Committee meeting, but it is extremely difficult to judge at this point whether this will have much effect.
It makes no sense to fight inflation with high interest rates alone when we have so many imbalances in both monetary and fiscal policy. We need a comprehensive anti-inflation plan, especially as next year there will also be a one-off contribution to inflation from the VAT increase.
Inflation cannot be solved by price controls or a higher base rate alone. In my view, systemic issues have to be addressed as well.
With inflation at this level, the tenge will always be under pressure, and that is normal. The problem is that, besides inflationary factors, the tenge is also pressured by capital outflow from the country caused by regulatory imbalances, which I have written about many times. Caps on foreign-currency deposit yields lead to capital flight through various channels, including portfolio investment. According to National Bank statistics, about USD 7 billion was moved out in the first half of this year. We therefore need to equalize returns and stop the outflow of capital.
Without foreign investment, it is extremely hard to expand domestic supply, so it is important to increase investment in our economy. Today, however, effectively only one channel works: government borrowing. The channels through banks and the stock exchange practically do not work. The stock market is the more complicated problem, but banks do not serve as a channel for attracting foreign investment because foreign-currency lending in Kazakhstan is restricted, as I have written before. Attracting foreign-currency investment would not only expand lending but also help support the tenge exchange rate, which in the short term would have a fairly positive effect on inflation. Let me pre-empt the haters right away: expanding foreign-currency lending concerns only the corporate sector, where there are also many barriers, and the foreign-currency lending channel must under no circumstances be opened to households. I am writing only about the corporate sector.
Many are skeptical about the effect of consumer lending on inflation, but in my opinion consumer lending undoubtedly expands demand and therefore affects inflation. So we need to work on consumer lending and channel it in the right direction. First of all, we need to restrict lending to those who will later face problems repaying their loans. I would favor a differentiated debt-to-income (DTI) ratio for borrowers: the higher the income, the higher the permissible DTI. It is also necessary