National Bank writes its own scenario
11/02/2005, Amangeldy Kirtaev
Already in mid-January the head of the National Bank announced that our country had a big inflation potential and that there was a possibility of "overheating economy", therefore it was necessary to make the monetary credit policies stricter.
Already then specialist form the bank worked on a new strategy until "Basic lines of the monetary and credit policy of the National Bank of RK for 2005-2007" appeared.
Since the beginning of 2004 the stability of prices has become the main objective of the central bank. Actually, if we judge from official statistic data, nothing extraordinary happened last year. The inflation, despite a number of unfavourable factors (including high oil prices and a growth of monetary mass in the country), has not gone beyond the corridor established by forecasts - 5-7 per cent and reached 6.7 per cent. However, on the financial market and among the common folks who are not very experienced in financial policies, there are expectations of inflation. And although consumer prices grew slowly, it is quite obvious that there is more money in the economy. It can be assumed not only from the fact that salaries and real incomes of the population grew as well, but also from the fact that the national business has big floating assets, which were always scarce before.
These factors urged the National Bank to make corrections in its policies. The first thing that this document makes one think about is a possibility of an "overheated economy". There is excessive liquidity in the banking system, which is due to foreign debts of the real sector ventures and commercial banks. Specialists from the National Bank predict that the GNP from 2004 to 2007 will grow 26.4 per cent and the bank credits granted to the economy will double. To this a significant inflow of foreign investments can be added and a growth of budget costs. In such conditions an "overheated economy" is very near.
This is why three options were developed for action - for all sorts of occasions: an option of moderate oil prices, of high prices, and correspondingly of low oil prices. And preferences to types of monetary and credit policy instruments will be given depending on the scenario that will be realised in the real life.
The first or basic scenario is based on a suggestion that in general in 2005 the situation on the foreign and domestic markets will remain the same as in 2004. The average oil price for "Brent" oil blend is suggested on the level of 35 USD per barrel. A growth of world interest rates is expected - from 2.5 to 3 per cent in 2005 and for 1 per cent in the next two years. In these conditions commercial banks will still borrow a lot at foreign financial banks, which means that the inflow of currency will be largely maintained.
This option seems to be the most realistic one to the National Bank, therefore the monetarycredit policy has been determined for this year.
In the first turn the National Bank is going to raise the regulating role of its main rates. That is why the refinancing rate was raised from 7 to 7.5 per cent as from 1 February. Correspondingly the official rates for repurchase operations were raised from 4.25 to 4.5 per cent. In the future the National Bank is going to revise and re-establish the refinancing rate regularly, once in a quarter.
Of course, it does not mean that the rate will change each time towards increasing or decreasing, but the central bank will be returning to this issue each time when it makes a decision.
The National Bank will significantly reduce the terms of circulation for short term notes in 2005 at the same time increasing the volume of their production. Bank deposits in the National Bank will be the main instrument for the sterilisation of the excessive liquidity. In the "Basic lines" it has already been indicated how a growth of such deposits will take place. It will provide a high level of the reserve coefficient (0.17), that is the correlation between the system reserves and deposits of the residents.
The norm of minimum reserve requirements will be changed to lower the acuteness of the excessive liquidity problem and to regulate the liquidity of the banks in a more flexible manner. There isn't any final decision on this, but the National Bank top management has already declared that it will be resolving it in a balanced manner, because "it is a really strong instrument of the monetary and credit policies". In the end of the day, the foreign loans of the banks depend on that.
The National Bank is going to maintain the floating exchange rate regime, but now unlike in the past it is not going to determine any long term established corridor and to try to maintain it in this corridor. The sole commitment that the National Bank undertakes is its passive presence at the currency market and, if it is necessary to take action in order to reduce consequences of short term speculative oscillations of the exchange rates. This precaution is due to the fact that in 2004 the National Bank bore costs amounting to 6.2 billion tenge.
According to the National Bank specialists in the nearest three years the monetary base and mass can grow more than 2.1 times. However it is not regarded as a threat of inflation. The point is that during the last few years there is a tendency towards reduction of the influence of monetary factors on the formation of the inflation, and therefore the monetary mass will not exert any strong inflation pressure.
The National Bank is sure that the maintenance of the macroeconomic stability and the stable development of the financial sector will promote a growth of deposits in comparison with the growth of cash in circulation.
However, to be sure the National Bank will most likely have to take measures to reduce the speed of the monetary base growth. The volume of the National Bank operations related with the sterilisation of the excessive liquidity can amount to more than average 600 billion per annum.
The National Bank is also going to continue pursuing its policy directed at a further liberalisation of the currency regime and as from 1 January, 2007, it will fully abolish the licensing of the currency operations.
Moreover, when the law "On currency regulation and currency control" is passed an efficient basis for a gradual transfer to the principles of full convertibility of the national currency will be created.
This scenario is not a dogma for the National Bank of the country. Probably the situation will develop in another manner and then other responses to challenges will be sought. Nevertheless, it looks certain that the National Bank will not let us return to the mid-1990-s when our salaries were losing their price before we could get them.