Kazakhstan Hikes Rates, Starts FX Sales to Support Its Currency

(Bloomberg) -- Kazakhstan raised its benchmark interest rate at an emergency meeting, making it only the second central bank to do so this year, and started selling foreign currency to help support the tenge after crude prices collapsed.

The National Bank of Kazakhstan raised the base rate by 2.75 percentage points to 12% on Tuesday to protect the tenge from increased external risks, support price stability and hold down the use of the U.S. dollar in the oil-based economy, Governor Yerbolat Dossayev told a cabinet meeting.

The central bank started currency interventions with an auction designed to maximize bids, saying $318.5 million was sold at 393.5 tenge per dollar. The tenge weakened 3.7% to 397 at 3:40p.m. in Almaty, extending losses from 394 per dollar before that announcement, according to Kazakhstan Stock Exchange data. Policy makers will resume currency sales as necessary, the central bank said separately.

Kazakhstan, the biggest oil producer in central Asia, follows the Czech Republic in raising rates, bucking a global trend aimed at spurring economic growth battered by the spread of the novel coronavirus. The government planned its budget using oil at $55 per barrel, while the tenge closely tracks the currency of Russia, its largest trading partner.

Brent clawed back some losses to trade as high as $37.38 a barrel, following a 24% plunge Monday. Saudi Arabia and Russia have positioned themselves for an oil price war after an agreement on crude production curbs collapsed last week. The ruble slumped 5% on Tuesday to the weakest in four years.

Kazakhstan’s state-run companies were prohibited from buying foreign currency from Tuesday, except where necessary to meet current obligations, Deputy Finance Minister Berik Sholpankulov said.

The central bank widened its rates corridor, formed from the overnight deposit and lending rates, to 1.5 percentage points around the benchmark, from 1 percentage point. The Deposit Insurance Fund also raised interest rate caps to 12.5% for non-term deposits, the central bank said.

The National Bank is ready to take additional measures to provide stability in the Kazakh financial market, Dossayev said.

On Monday, President Kassym-Jomart Tokayev ordered the creation of an emergency reaction center to stabilize the economy and told the government to weigh measures including possible budget spending cuts, while maintaining social spending.

--With assistance from Naubet Bisenov.

To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Tony Halpin

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