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Inflation Kazakhstan

Kazakhstan Plans Shift to Inflation Targeting to Support Tenge

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Kazakhstan will start laying the foundation next year for a shift to inflation targeting in the medium term and take steps to boost use of the national currency.

“Inflation targeting will make it more profitable in real terms to hold tenge savings and reduce inflationary expectations, ” the Kazakh central bank and government said today in a joint statement on economic policy for next year published on the prime minister’s website. Kazakhstan seeks real economic growth of 4 percent to 5 percent next year.

Kazakhstan is trying to shore up faith in the tenge after the currency of Russia, the central Asian nation’s largest trading partner, tumbled about 40 percent this year. Policy makers devalued the Kazakh currency by 19 percent in February, citing the weakening ruble, locking it in a band around 185 per dollar. The central bank in Almaty is spending reserves to keep the tenge from weakening, according to Halyk Finance.

The central bank “may gradually widen the band in subsequent months and years, preparing for an eventual switch to inflation targeting, ” Tatiana Orlova, chief economist for Russia at the Royal Bank of Scotland Group Plc in London, said in Dec. 2 note. A target date before 2017 or 2018 might be difficult to achieve, she said.

“The band could be gradually widened on the upside to make it symmetric, to 185 plus/minus 15 tenge, and allow the tenge to weaken to the upper bound of the band, ” according to Orlova.

Tenge Fluctuations

Kazakhstan won’t allow sharp fluctuations in the tenge and won’t let reserves fall below 3 months of worth imports, according to the statement. Central Asia’s biggest energy producer will also double the deposit insurance level to 10 million tenge and forbid pricing in conditional units.

Contagion from the ruble’s 40 percent decline this year is spreading across the former Soviet Union, as nations are hit by a drop in Russian buying power as well as cheaper imports flooding their markets and straining local industry. Belarus tightened capital controls last week as the Georgian lari and Armenian dram plummeted to 10-year lows this month.

“If the situation worsens on external markets, the government and central bank will take additional steps to ensure social and economic stability, ” they said.

The ruble’s plunge will force Kazakh policy makers to allow the tenge to drop at least 10 percent by March 31 to boost competitiveness versus Russia, Bank of America Corp. said in a research note last week.

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