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What is a floating rate?

According to the Chairman of the National Bank of Kazakhstan Galymzhan Pirmatov, the regulator remains committed to the principles of free floating of the exchange rate in the currency policy and does not “hold” the ruble exchange rate. In this material we will tell you what the floating rate is, what affects the tenge and why the National Bank has chosen such a mode.
What is a floating rate?

Exchange rate is the value of the currency of one country in terms of the currencies of other countries. It determines, for example, how much tenge is worth a dollar, Kyrgyzstani som or ruble.

Floating exchange rate

The exchange rate mode depends on how developed the country's economy is. There are several regimes of currency regulation: a floating exchange rate, managed floating exchange rate (for many years this was the case in our country), fixed exchange rate (the ruble in the USSR).

“The value of the tenge in our country depends on the currency supply and demand. However, the National Bank has practically no effect on this situation, but if there are sharp spikes, for example, a pandemic, political news, the National Bank of the Republic of Kazakhstan can buy or sell foreign currency on the domestic market to smooth out these fluctuations. After all, the main goal for a first-tier bank is to maintain financial stability in the country, and not to achieve a certain value of the exchange rate. “In order to prevent a threat to financial stability, the National Bank reserves the right to interfere in foreign exchange trading in case of excessive exchange rate volatility. As previously stated in the NB official reports, tenge volatility will depend on changes in the geopolitical situation, expectations of domestic participants and the situation on world markets in the short term,” noted Galymzhan Pirmatov.

At the end of each month, the National Bank discloses information on foreign exchange interventions (operations of the National Bank of the Republic of Kazakhstan that affect the value of the tenge).

Why the exchange rate is floating in our country?

It is impossible to manage both the exchange rate and inflation at the same time in open market economy and free international movement of capital. If the National Bank intends to control inflation, the exchange rate must be regulated exclusively by the market. Many countries, including ours, have tried various monetary policies, both the exchange rate containment and absence of any benchmarks.

Why does the National Bank set official exchange rates?

By law, the regulator is obliged to set official exchange rates and inform about it. The National Bank determines official rates based on market quotations, which depend on the supply and demand for foreign currency.

Currency pair Ruble-Tenge

“It is important to understand that the tenge exchange rate against the Russian ruble is not formed directly but completely depends on how the tenge and ruble behave individually against the US dollar. The tenge-ruble market is not deep or liquid enough for independent development. This is due to the trade imbalance between the Russian Federation and the Republic of Kazakhstan, as well as the fact that Kazakhstani exporters do not sell their products to the Russian Federation for tenge, unlike Russian exporters, who sell most of their exports to Kazakhstan for Russian rubles. Thus, this leads to low demand for tenge in the Russian Federation. Following the policy of a floating exchange rate eliminates the accumulation of imbalances and at the same time allows save the country's gold and foreign exchange reserves. Therefore, any manipulations with the exchange rate of the national currency in order to influence the parity with the ruble or any other currency are excluded,” the head of the National Bank concluded.

Source: https://prodengi.kz/post/cto-takoe-plavayushhii-kurs

Photos are from open sources.

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