The main directions of the monetary policy

According to the previous practice National Bank of Kazakhstan annually develops “The main directions of monetary policy” for the next 3 years which identify targets for the inflation, as well as measures of monetary policy to achieve them. Determination of strategic policy for the medium term increases the predictability of policy of the National Bank of Kazakhstan and reduces the uncertainty level for financial market participants in the direction of its development.

In 2012 the execution of the tasks standing in front of National Bank of the Republic of Kazakhstan were complicated by the high degree of uncertainty prospects for the global financial market development and hence for the domestic economy too. In the conditions of high risk of further deterioration in global financial markets, central banks of the major developed countries have begun to help their banking systems to stabilize the situation.

In these conditions, the National Bank of Kazakhstan has decided to develop the main direction of monetary policy focusing on the range of measures to ensure the stability of the banking system of our country.

The financial turbulence in the world economy has been demonstrated the susceptibility of Kazakhstan's economy to external risks. The fundamental features of economic development that has evolved over the past few years became one of the main factors of vulnerability.

The trends in the global economy in 2011 showed that actions taken by central banks and governments of the EU members and the USA as well as by other countries that were mostly hit by the economic crisis resulted in the temporary mitigation of its implications but didn’t lead to recovery from the crisis. Besides, taken actions which consisted in providing liquidity to commercial banks, led to logical outcomes of such policy, mainly in boosting the inflation.

Contrary to the initial recessionary impetus of 2007-2008 which stemmed from the USA, now the Eurozone countries may be regarded as the epicenter of recessionary “impulses”. Due to deep correlation of financial and economic relations between the regions, negative economic developments in one region immediately cause a knock-on effect in other regions.

According to preliminary data, GDP increased by 0.2% in the area of circulation of the common European currency (Euro) in the 3^rd quarter of 2011. This appeared to be its worst performance since recovery after the recession of 2009. Sovereign debts of the peripheral countries remain high and the prospects of bankruptcies at the level of countries are already becoming a reality.

In May 2010 the European Union member countries made the decision to establish the European Financial Stability Facility (“the EFSF”) – a special purpose vehicle to address the European sovereign debt crisis. Its objective is to preserve financial stability in the European Union by providing financial assistance to euro area Member States if needed. The assistance is expected mainly from the Asian countries.

In September 2011 the European Central Bank (“the ECB”), in coordination with the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank announced about conducting three tenders on the US dollar liquidity-providing operations to prevent liquidity problems. This action was aimed at providing financial resources to European banks.

To avoid the non-payment crisis and encourage economic growth, the U.S. Federal Reserve System (“the U.S. FRS”) implemented two mitigation programs in the amount of about US$ 1.6 trln. in 2008-2011. The quantitative easing programs are used as a monetary policy instrument by the governments when the interest rate of the country is so low that makes it unfeasible to use it to decrease the national currency exchange rate and increase the money supply.

Discount rates of central banks in the developed countries still remain low. However, in April 2011 the ECB raised the Euro discount rate for the first time in the last two years. It was raised by 25 basis points to1.25%. No similar steps were followed by central banks of the US and UK since there are concerns that the economies of the two countries will not sustain the increase in the bank interest rate and will be in danger of entering into recession. At the same time it’s obvious that such monetary policy of the developed countries will logically result in high inflation rates.

Inflation risks increased also due to the inflation “surge” in China which boosted centralized investments in its economy with a view to re-orient from the exporting to the stimulation of the domestic demand. Tremendous growth in the government investments resulted in signification acceleration of inflation in China and forced the Chinese Government to tighten its financial policy, which may inevitably lead to the decreased Chinese demand in the global markets.

In the context of such recessionary developments in the global economy the following factors of influence on the further operation of the Kazakh financial system appear – the access to foreign borrowings for commercial financial entities will remain limited (former donor countries which used to provide credit resources now are in need of such resources themselves); stagflation trends in the global economy are increasing. In general economic terms it should be mentioned that favorable pricing environment for major items of the Kazakhstan’s export may change unpredictably affected by implications of the crisis.

Stable development of the Kazakh economy was driven by the above-mentioned factor of favorable prices of export items as well as by implementation of the anti-crisis program of the Government of the Republic of Kazakhstan and the National Bank of the Republic of Kazakhstan. Stable operation of the financial sector and the deposit base growth represent key indicators in this aspect.

The credit growth in the banking sector is observed for the first time in the last three years. Slow pace of credits to the economy is driven by low confidence of creditors in potential borrowers as well as by poor quality of the loan portfolio of banks.

Monetary policy measures coupled with actions taken by the Government of the Republic of Kazakhstan allowed slowing down the rates of inflationary processes which accelerated in the first half of the year as a result of external shocks. Already at end-October 2011 the annual inflation rate was back within the target band of 6-8%.

The described developments in the aggravation of crisis in the developed countries didn’t affect the stability of the domestic currency in Kazakhstan owing to the implementation of the monetary policy aimed at preventing dramatic fluctuations of the Tenge exchange rate.

Sustainability of the Kazakh economy to possible upsurges of the global economic crisis is supported by the “safety margin” denominated in gold and foreign currency reserves of the country and the National Fund of the Republic of Kazakhstan. [1]

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