As inflation soars around the globe, central banks are battling to tighten pecuniary policy to send on their mandates on maintaining price stability, and the National Bank of Kazakhstan is not an exception. Its decision to raise interest rates helped to stabilize the situation.
However, the central bank may need to tighten financial policy further to bring increase back to target and anchor expectations-even nonetheless that could weaken immediate economic growth.
Price stability is a precondition for macroeconomic stability and sustainable economic growth. It helps to preserve standards of living. Inflation, on the contrary, is the worst tax on the poor. Central banks must maintain people’s trust in their ability to keep prices stable. This is why, around the world, price stability is central banks’ overriding objective.
As we see today, situations unavoidably arise when countries face a trade-off between preserving price stability and supporting economic growth. This is when the independence, as well as the credibility of central banks, is tested, and there is a likelihood that people lose faith in the monetary authorities’ capability to disallow prices from spiking. Interestingly, interest rates may then have to rise even higher to reach the same stabilizing effect.
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Targeting inflation in the Republic of Kazakhstan
The Republic of Kazakhstan has had a constructive involvement of transitioning to rise targeting, where the central bank is assigned rather than target growth, the money supply, or the exchange rate.
The country’s central bank’s as well as reliance on the exchange rate, has helped anchor inflation potentials and absorb outdoor shocks since 2015.
Still, the transition remains incomplete. More progress is necessary, including diversifying the country’s economy.
The long-term benefits are substantial, and the central bank’s Economic Policy Strategy 2030 lays out inclusive reforms to address many of these contests.
In the meantime the National Bank of Kazakhstan’s mandate or weakening its independence. Pursuing various prices stable could negatively affect the monetary policy’s effectiveness as well as accountability.
International experience indicates a more rationalized mandate for the National Bank of Kazakhstan is desirable.
Getting rid of non-core activities, such as sponsored lending programs as well as other quasi-fiscal roles would increase and credibility of the country’s central bank.
Multiple shocks, multiple policies
Today’s economic environment – in Kazakhstan and elsewhere – is categorized by many shocks: the Covid-19 pandemic, supply chain disruptions, the war in Ukraine, and permissions against the Russian Federation.
Many public establishments have a role in executing policies to reduce the immediate pain, especially for vulnerable groups. They should also support long-term growth and inclusion.
Governments can use fiscal policy to support domestic demand and growth. This is the case of Kazakhstan, the largest economy of Central Asia, where elevated oil revenue provides room for increased outlay.
Fiscal policy must, needless to say, strike a balance between auxiliary the economy, conserving fiscal sustainability, and preserving macroeconomic stability.
