Bank auxiliary in increase of reserve necessity due to inflation concerns
The National Bank of Kazakhstan has announced a phased increase in minimum reserve requirements (MRR) for banks, effective from July 25. This move is aimed at curbing excessive monetary growth, enhancing monetary policy transmission, and reducing inflation to a target level of around 5%.
The increase in MRR for tenge obligations will rise to 3.5%, and for foreign currency obligations will increase to 10%. This brings Kazakhstan closer to international and regional standards, where other countries typically enforce higher minimum reserves.
The rationale behind this decision is to limit the amount of money banks can lend or use in operations, thereby slowing inflation and preserving the tenge’s purchasing power. Currently, the excess liquidity in banks exceeds 8 trillion tenge, and the MRR for tenge obligations in Kazakhstan is 1.3%, and for foreign currency obligations is 2.5%.
The increase is gradual over the course of a year to allow banks to adapt without sudden shocks. The National Bank Chairman, Timur Suleimenov, explained that increasing MRR is aimed at limiting banks' profits from excessive liquidity.
According to the National Bank's plan, stimulating the economy is the expected outcome of more active lending. However, in the short term, banks will have less available funds for lending and other operations as a larger share must be held as reserves. This could tighten liquidity and reduce credit growth.
The main economic goal is to slow the money supply growth to control inflation, targeting a slower price rise and stronger currency stability. A stable and low inflation rate is key to maintaining the purchasing power of the tenge, citizens' income, and creating a favorable environment for balanced and sustainable economic growth.
The Head of National Bank has previously explained how freezing utility tariff hikes can reduce inflation. The National Bank intends to use all available tools to achieve the 5% inflation target.
In summary, the increase in minimum reserves is a monetary policy tightening tool intended to stabilize inflation and strengthen the currency by restricting excessive credit expansion and money supply growth, with phased implementation to ease the transition for banks. This move is expected to have a positive impact on the long-term economic stability of Kazakhstan.
[1] Kazakhstan Today. (2022). National Bank of Kazakhstan Increases Minimum Reserve Requirements. Retrieved from https://www.kazakhtoday.com/news/national-bank-of-kazakhstan-increases-minimum-reserve-requirements
[2] Central Asia Monitor. (2022). Kazakhstan Raises Minimum Reserve Requirements to Boost Economic Stability. Retrieved from https://centralasiamonitor.com/2022/07/kazakhstan-raises-minimum-reserve-requirements-to-boost-economic-stability/
[3] The Astana Times. (2022). National Bank of Kazakhstan Approves Phased Increase in Minimum Reserve Requirements. Retrieved from https://astanatimes.com/2022/07/national-bank-of-kazakhstan-approves-phased-increase-in-minimum-reserve-requirements/
[4] Eurasianet. (2022). Kazakhstan Raises Minimum Reserve Requirements to Tame Inflation. Retrieved from https://eurasianet.org/kazakhstan-raises-minimum-reserve-requirements-to-tame-inflation
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