Experts: As Inflation Falls, Kazakhstan Faces New Monetary Policy Trade-Off

The Astana Times provides news and information from Kazakhstan and around the world. ALMATY – Kazakhstan’s annual inflation slowed to 10.2% in July, extending its decline for a tenth consecutive month, while lending is increasingly shifting from consumer borrowing toward business financing, according to National Bank (NBK) Governor Timur Suleimenov’s report to President Kassym-Jomart Tokayev on Aug. 13.  From L to R: Timur Suleimenov and President Kassym-Jomart Tokayev. Photo credit: Akorda. The figures point to a changing balance in Kazakhstan’s economy. Inflation is moving lower, and the NBK has already begun cautiously easing monetary policy, cutting the base rate to 16.75% in July. At the same time, stronger investment activity and continued quasi-fiscal stimulus are supporting faster economic growth, creating a potential limit on how quickly borrowing costs can decline further. The National Bank’s next policy decision is scheduled for Sept. 4, when markets will be watching to see whether the regulator finds sufficient evidence that the slowdown in inflation is sustainable. Inflation slows, creating room for cautious easing According to Suleimenov, annual inflation declined to 10.2% in July. The slowdown follows a series of policy decisions that have gradually reduced the National Bank’s base rate. The regulator kept the rate at 18% in April, lowered it to 17% in June and then reduced it by another 25 basis points to 16.75% on July 24. The latest reduction was significant because it marked a shift from maintaining restrictive conditions toward a cautious normalization of monetary policy. However, the National Bank has stressed that the decline in inflation does not mean the inflation problem has been resolved. In its July decision, the regulator noted that some underlying components of price growth remained elevated and inflation expectations continued to pose risks. The NBK therefore said that further decisions would depend on evidence that disinflation is sustainable, rather than on a predetermined path of rate cuts. The central bank expects inflation to remain between 9% and 11% in 2026, then slow to 5.5%-7.5% in 2027 and approach its 5% target in 2028. The key contradiction: growth is helping the economy but complicating inflation policy One of the most important factors shaping the National Bank’s next steps is the strength of economic activity. According to the report, GDP growth reached 3% year-on-year in the first quarter of 2026, supported by stronger-than-expected investment activity.  Investment demand is expected to remain a major driver of growth, including through quasi-fiscal financing, subsidized loans, development institutions and guarantees supporting large projects. This creates a more complicated environment for monetary policy. Normally, lower inflation would provide a stronger argument for cutting interest rates. But faster economic growth and continued investment stimulus can increase demand and liquidity, potentially adding new pressure to prices. The National Bank has repeatedly identified the scale and parameters of quasi-fiscal stimulus as one of the major risks to the inflation outlook. In its monetary policy assessment, it warned that active quasi-fiscal financing can partly offset the effects of tighter monetary conditions and weaken the transmission of the base rate through the economy. In other words, Kazakhstan is entering a phase in which monetary and quasi-fiscal policies will need to be more closely coordinated. The faster the government and quasi-public sector stimulate investment and demand, the more cautious the National Bank may need to be about reducing interest rates. Credit growth shifts toward business Suleimenov also reported a notable change in the structure of bank lending. As of July 1, business lending had increased 17.1% year-on-year, while lending to small and medium-sized enterprises accelerated to 29.6%. Meanwhile, consumer lending growth slowed from 21% at the beginning of the year to 13%, reflecting prudential measures and a gradual normalization of retail credit growth. The shift is important for the broader economic strategy. Kazakhstan has long faced concerns about rapid growth in household borrowing and its potential contribution to consumption-driven demand. A slowdown in consumer lending combined with faster business financing could help redirect credit toward investment and production. Earlier National Bank data showed that SMEs were already the primary source of growth in corporate lending, while mortgage lending continued to expand, supported by preferential housing programs. Whether this shift becomes sustainable will matter. Business lending can support productivity and supply capacity over the longer term, potentially reducing inflationary pressures if financing results in higher output. But in the short term, large-scale investment spending can also increase demand for imports, labor and construction materials. A stronger tenge offers additional support The strengthening of the tenge has also become an important part of the recent disinflation story. According to economist Ruslan Sultanov’s analysis of July currency market data, the rate on the Kazakhstan Stock Exchange fell from 480.72 to 473.59 tenge per dollar during the month, while the weighted average rate on the over-the-counter market strengthened from approximately 486.2 to 471.4 tenge per dollar. According to Sultanov, the strengthening occurred despite continued substantial demand for foreign currency. The Unified Accumulative Pension Fund purchased $375 million on the market in July, while the mandatory sale of part of quasi-public-sector foreign-currency revenues was suspended as of July 15. At the same time, the National Bank did not conduct foreign exchange interventions, while sales from the National Fund totaled $200 million, and quasi-public-sector entities sold around $195 million. “This is an interesting signal: even with significant counter‑demand from the fund and a reduction in one of the sources of the mandatory currency supply, the market still ended the month with a stronger tenge,” Sultanov wrote in his Telegram channel.  A stronger tenge can help slow inflation by reducing the cost of imported goods and limiting the pass-through of exchange-rate movements into consumer prices. The National Bank has identified the stronger currency as one of the factors supporting disinflation. Markets expect another cut, but not a rapid easing cycle Professional market participants surveyed by the Association of Financiers of Kazakhstan in August have become more optimistic about both inflation and the tenge. Their 12-month inflation forecast declined to 10.1%, while 60% of respondents expected the National Bank to lower the base rate to 16.5% at its Sept. 4 meeting. Another 28% expected the rate to remain unchanged at 16.75%, while 12% allowed for a rate increase. Over a 12-month horizon, respondents expect the base rate to fall to 14.75%. Yet even this forecast points to gradual rather than aggressive easing. According to the AFK’s analytical center, the projected real interest rate would remain positive at around 4.65%, reflecting expectations that inflation risks will continue to constrain the speed of rate cuts. That cautious outlook broadly corresponds with the National Bank’s position. The regulator has emphasized that the return to its 5% inflation target depends not only on interest rate policy, but also on fiscal consolidation, a narrowing of quasi-fiscal stimulus, stable inflation expectations and predictable tariff policies. The Sept. 4 rate decision will therefore be about more than whether the base rate is reduced by another 25 basis points. It will provide a clearer indication of how the regulator views this trade-off: whether the recent decline in inflation is sufficient to justify a broader easing cycle, or whether Kazakhstan’s accelerating investment-driven economy will require monetary policy to remain restrictive for longer. The post Experts: As Inflation Falls, Kazakhstan Faces New Monetary Policy Trade-Off appeared first on The Astana Times.