Is the National Bank of Kazakhstan taking charge of monetary policy?
The National Bank, which has had three governors in a little more than three years, keeps on trucking – but with one foot on the brake pedal. On February 2, the central bank increased the basic interest rate by 1%, to 17% per year. The Bank wants to raise demand for the tenge, which is getting hammered in the foreign exchange markets. The Bank reasons that a higher interest rate makes a Kazakhstani asset more attractive to investors; to buy it, they’ll need tenge. Along the same lines, the Bank has increased the top annual rate that commercial banks can pay for new tenge deposits by individuals to 14%; the old rate was 10%.
The Bank is doing too little too late. To make depositors indifferent between holding tenge and dollars, the expected rate of return must be the same for both. Even a 17% return to the tenge may not be enough to tempt depositors to stick to that currency, because they want to be compensated for their expectations of inflation and depreciation. In the past two months, consumer prices in Kazakhstan have risen at an annualized rate of more than 13% or 14%. If investors expect this to continue, then they will regard roughly 14% of the tenge return as mere compensation for higher prices. So the expected profit to holding a tenge asset is just 3% per year.
But that’s a mirage, too, because the tenge is
losing purchasing power over foreign products even faster than over domestic
products. Since August, the exchange rate of tenge for a US dollar has risen
from about 190 to 380, a rate of depreciation of 100% over five months. The annualized rate is more than (12/5)*100%,
or 240%. This estimate is conservative, since it takes no account of
compounding. But it will serve to show
that if people expect the tenge to keep depreciating as rapidly as it has, they
won’t settle for a measly return of 17%.
(Why should the rate of return to holding a tenge
compensate for depreciation? Think of the exchange rate as the tenge price of a
dollar. When the exchange rate doubles, the price of the dollar rises by 100%.
The rate of return to holding tenge should compensate you for this increase.
Otherwise, you won’t be able to buy as much of goods priced in dollars as you
can today. How much compensation should you receive? Well, since the exchange rate will double
next year, you should receive another tenge then for every tenge that you hold
today. That’s a 100% rate of return.)
True, a dollar deposit in a Kazakhstani bank can earn an annual return of only 2%, which the Bank has just lowered from 3%. But no one expects the dollar to depreciate relative to the tenge; quite the contrary. And expectations of inflation in the US are just about nil. Consumer prices there have been so stable that Americans think that 2% inflation would be a big deal. Kazakhstanis would love to have their problem.
No way out?
Since the tenge may continue to lose purchasing power, the tenge share of individuals’ deposits in Kazakhstan, which has fallen from 33% to 21% in just a year, seems unlikely to recover soon. What can the Bank do about it? Not much. Suppose that it suddenly raises the basic interest rate by 240%. Then the financial markets will panic -- and business expansion, which in Kazakhstan is mainly fueled by bank loans, will drop faster than an iron stove tossed off the Leaning Tower of Pisa. So the Bank can only make honorable gestures, like raising the basic rate by a percent.
A higher interest rate does make tenge assets more attractive than before and so might slow the flight to dollars. But it will also discourage the borrowing of tenge to create capital. Economic activity will diminish; and we’ll have to do without some new factories and education, retarding economic growth. The biggest victim will be the construction industry, which is built on loans and low interest rates.
The National Bank got into this pickle by squandering its credibility through policy reversals over the past three years. If it still had a good reputation, then a modest increase in the basic interest rate might have convinced people that it would protect the tenge. The Federal Reserve and the European Central Bank find that boosts in interest rates of just a half or a fourth of a percentage point are enough for showing the colors. But those two banks are politically independent. The National Bank of Kazakhstan is more like the Central Bank of Russia: Everyone regards it as a tool of politicians and consequently just as fickle as they. Result: The Bank is reacting to events rather than managing them.
There is a small chance that the Bank can escape its impasse. Its two hikes of interest rates in the past few months may conceivably turn Kazakhstan’s economic slowdown into a recession. If regardless of this the Bank persists in its tough-guy policy, then it may persuade people that it is serious about targeting inflation. And they may act accordingly, hanging on to tenge rather than dumping them for dollars. At that point, the exchange rate may stabilize and inflation may level off. It’s a costly policy, and it may even look prohibitively costly -- until one considers the alternative. – Leon Taylor tayloralmaty@gmail.com
Kazakhstanskaya Pravda. Interest rates on deposits in tenge to be increased in February 2016 – RK National Bank. January 21, 2016. www.kazpravda.kz
No comments:
Post a Comment