SEPT. 2 2015 (The Conway Bulletin) – Kazakhstan’s Central Bank picked the overnight repo rate as its benchmark interest rate and main tool for manipulating monetary policy, setting it at 12%.

The decision came two weeks after the Central Bank allowed the tenge to free float, abandoning the peg to the US dollar. The free-float pushed the value of the tenge down by 23%, the second devaluation in less than two years.

“This rate is aimed at directing nominal rates in the money market and will become a key instrument of the credit and monetary policy, in the new inflation-targeting regime,” the Central Bank said in a statement.

The tenge traded at around 240 to $1 immediately after the new interest rate was announced, having strengthened from 252 to $1 after the US dollar peg was ditched in August. By comparison, in February 2014, before the first devaluation, the tenge traded at 155 to $1.

Analysts welcomed the relatively high benchmark interest rate, saying that the tenge needed this level of support.

Sabit Khakimzhanov, head of research at Halyk Finance, said that the Central Bank may even need to increase this key interest rate by one percentage point to 13%.

“The interest rate in the money market is the only instrument left at the disposal of the NBK (National Bank of Kazakhstan) to manage inflation and the exchange rate,” he said.

“Only by keeping the rates credibly high, that is, at a level sufficiently high to enforce the necessary discipline and for a sufficiently long time. The interest rate corridor 12-14% meets these requirements.”

Other analysts said the high interest rate may encourage Kazakhs to keep their money in the bank.

“The high rate levels are clearly seen as securing the banking system from deposit outflows and anchoring inflation expectations,” Dmitry Polevoy, a Moscow-based economist at ING Groep NV, told Bloomberg News.

Previously the key interest rate had been the ineffective refinancing rate set at 5.5%.

Earlier this year the Kazakh government said that targeting inflation was going to be the main driver of its future economic policies.

The problem is that with the tenge devaluing and with oil prices remaining stubbornly low, the Kazakh government has already said that inflation is likely to climb above its 6-8% corridor target.