Republic of Kazakhstan: Selected Issues

This Selected Issues paper applies a range of quantitative methods to explain recent inflation dynamics in Kazakhstan. It presents an overview of recent developments and utilizes a principal component analysis to decompose inflation in Kazakhstan between global, regional, and domestic sources. In addition, it estimates a Phillips curve model, augmented with external variables, to quantify the drivers of inflation. The paper also estimates a vector autoregressive model to look more closely at dynamic effects. The results show that external factors have had a strong impact on inflation dynamics in Kazakhstan in the recent period, but domestic factors remained important. Looking ahead, inflation in Kazakhstan will depend significantly on the global environment but will also be shaped by domestic policy decisions. In the near term, premature monetary policy loosening should be avoided. In the medium term, efforts to strengthen the monetary policy framework should continue to help moderate the volatility of inflation and reach the inflation target. Fiscal policy should remain supportive of price stability.