Why Kazakhstan’s Central Bank Must Protect Price Stability—Even If It Weakens Growth in the Short Run

IMF News, June 29, 2022

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Canonical URL: Why Kazakhstan’s Central Bank Must Protect Price Stability—Even If It Weakens Growth in the Short Run

Author: Nicolas Blancher.
Publication date: June 29, 2022.
Core message: Amid strong inflationary pressures, the National Bank of Kazakhstan (NBK) must prioritize price stability—even if tighter monetary policy weakens short‑term growth—to preserve credibility and anchor inflation expectations.

Price stability is presented as a condition for macroeconomic stability and sustainable economic growth.
Inflation is characterized as "the worst tax on the poor," underscoring distributional costs of elevated inflation.
Loss of trust in monetary authorities can raise the cost of stabilizing inflation: "Interest rates may then have to rise even higher to achieve the same stabilizing effect."

Kazakhstan has transitioned to inflation targeting, with the NBK mandated to maintain a certain level of price increases rather than target growth, the money supply, or the exchange rate.
Since 2015, the NBK’s increased focus on domestic price stability and reliance on exchange rate flexibility has helped anchor inflation expectations and absorb external shocks.
The transition is described as incomplete; necessary further steps include:
- Diversifying the economy.
- Reducing dollarization.
- Limiting exposure to external shocks.
The NBK’s Monetary Policy Strategy 2030 is cited as laying out comprehensive reforms to address many of these challenges.
International experience supports a more streamlined NBK mandate; suggested actions include phasing out non-core activities such as subsidized lending programs and other quasi-fiscal roles to strengthen monetary policy effectiveness and central bank independence and credibility.

Current environment characterized by multiple shocks: the COVID-19 pandemic, supply chain disruptions, the war in Ukraine, and sanctions against Russia.
When high inflation limits monetary easing, fiscal policy can be used to support domestic demand and growth.
Kazakhstan’s elevated oil revenues provide room for increased fiscal spending, but fiscal policy must balance:
- Supporting the economy.
- Preserving fiscal sustainability.
- Maintaining macroeconomic stability.
Structural reforms are necessary for long-term growth in Kazakhstan, where the state plays a predominant economic role; improving the business environment is key to market-based transition, private sector‑led diversification, and job creation.

The NBK should maintain price stability as its primary objective.
Preserve the NBK’s independence and credibility by avoiding broadened mandates that pursue multiple objectives simultaneously.
Phase out non-core central bank activities (for example, subsidized lending programs and other quasi-fiscal roles) to increase monetary policy effectiveness and accountability.
Use fiscal policy to cushion the impact on vulnerable groups and support growth when monetary policy must tighten to restore price stability.
Pursue structural reforms to diversify the economy, reduce dollarization, and lower external vulnerability to support long‑term inclusive growth.

Source: Nicolas Blancher, "Why Kazakhstan’s Central Bank Must Protect Price Stability—Even If It Weakens Growth in the Short Run", June 29, 2022.