When a central bank jiggles its monetary policies,
economists say it is “fine-tuning.” Last week, the National Bank of Kazakhstan
turned up the radio full blast.
The central bank raised the base interest rate, a
benchmark for the national economy, from 9.25% to 12% per year. Even a change
in the base rate of just half a percentage point would be big news. The rise of
nearly three percentage points may lead commercial lenders to raise their own
rates sharply.
The National Bank worries about the exchange rate,
which has skyrocketed above 405 tenge to a US dollar, the highest it’s been
since at least 1993, according to National Bank data. High interest rates can
steady the exchange rate by rewarding investors for buying tenge-denominated
assets that pay interest. Why? Because investors
will sell dollars for tenge in order to buy the assets. The asset purchases raise
demand for tenge, relative to the dollar, so the tenge will strengthen in terms
of bucks. In other words, the exchange rate will fall. For example, suppose
that the exchange rate declines to 200 tenge. (It won’t, but never mind.) Then the value of the tenge will rise from 1/405
of a dollar to 1/200.
The steep increase in the base rate also signals the Bank's determination to hold the line on the exchange rate. The National Bank would prefer that the foreign exchange market stabilize on its own, but it says it will intervene in the foreign exchange market “if necessary.” In that case, the Bank might buy tenge and sell dollars. It reports $30 billion in dollar reserves.
The steep increase in the base rate also signals the Bank's determination to hold the line on the exchange rate. The National Bank would prefer that the foreign exchange market stabilize on its own, but it says it will intervene in the foreign exchange market “if necessary.” In that case, the Bank might buy tenge and sell dollars. It reports $30 billion in dollar reserves.
The National Bank also worries about inflation, the
average rate of increase in prices. Inflation hit 6% last month, which is the
upper bound on the Bank’s target range for inflation (4% to 6%).
Unfortunately, high interest rates can also throttle
an economy. They make it more expensive for firms and people to borrow―say, to
build a factory or buy an education―so they will spend less. Nationwide demand
will fall. Goods will pile up in warehouses, so retailers will not order more
supplies. Warehouse workers will lose their jobs and thus cut back their own
spending, causing the grocery to lay off workers, and so on. The economy will
slow down.
In that light, this may be exactly the wrong moment
for raising the interest rate. The World
Health Organization announced last week that the covid-19 disease has become a
pandemic. In Kazakhstan, university classrooms are closing, and international tourism
will suffer.
In addition, the spot price (that is, the current price) of Brent crude, a
benchmark for the global oil market, has nearly halved since October 2018, to $45.60
per barrel, according to the United States Energy Information Administration. The price on futures for West Texas
Intermediate crude, which reflects expectations, has nearly halved since last
year, falling to $31.50. Prices are collapsing partly because of competition
within the oil cartel OPEC+ for customers.
In the short run, the price declines can reduce revenues from oil
exports, which account for roughly a fourth of Kazakhstan’s economy.
When aggregate demand falls, central banks usually try
to stimulate the economy by lowering interest rates, not raising them. The National
Bank will announce any changes in its base rate on Monday. Stay tuned. –Leon Taylor, tayloralmaty@gmail.com
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