Correlation Between the Tenge Exchange Rate and Inflation (1-Month Lag)
Translated from Russian with the help of AI. Original: Russian version
The correlation between the tenge exchange rate and inflation at a one-month lag is 0.47. Supporting the tenge through market-based methods would reduce inflation and allow the base rate to be lowered.
If we calculate the correlation between monthly changes in the tenge's exchange rate against the US dollar and inflation at various lags, starting from August 2015 (the move to a floating exchange rate), two things stand out clearly:
- The exchange rate's influence peaks with a lag of the second month. In other words, a change in the tenge's rate against the US dollar pushes up inflation in the following month.
- There is a moderate correlation of 0.47 between the tenge exchange rate and inflation at a one-month lag. A correlation of 0.47 means that the exchange rate accounts for roughly 22% of inflation.
The following chart shows the effect of the exchange rate on inflation with a one-month lag. It makes clear that in most cases higher inflation is accompanied by a sharp depreciation of the currency.
Looking at this year's monthly inflation figures, the highest readings came in the first three months of the year. This is the result of two factors:
- a seasonal rise in food prices, as prices usually go up in the first three months, as was the case in all previous years;
- an increase in tariffs at the start of the year.
Since April 2025, inflation has been declining, followed by a sharp rise in August and September. This corresponds to the currency's depreciation of 2.71% in July and 1.99% in August (4.75% over the two months).
In September and October 2025, the exchange rate stabilized and inflation slowed to 0.5% and 0.8%, respectively. December is traditionally a month of rising inflation, but I expect the significant strengthening of the tenge and the freeze on tariffs to slow the pace of inflation.
In the current situation, the base rate has been at a high level for more than three years and is not enough to contain inflation. We therefore need to work on the factors that influence the tenge exchange rate. In other words, supporting the tenge will have a positive effect on inflation, given the moderate link between the exchange rate and inflation.
To this end, we must eliminate the existing imbalances in the country's monetary policy, which are currently encouraging capital outflows and weighing on the tenge exchange rate. We must also increase the supply of foreign currency on the market by replacing domestic government borrowing with external borrowing. Over a short-term horizon of 6–12 months, supporting the tenge would reduce inflation expectations and inflation itself and allow the base rate to be lowered. In my estimation, the base rate could be brought down to 12–14% within a year, over a horizon of 9–12 months.
| Jan-25 | Feb-25 | Mar-25 | Apr-25 | May-25 | Jun-25 | Jul-25 | Aug-25 | Sep-25 | Oct-25 | Nov-25 ---|---|---|---|---|---|---|---|---|---|---|--- Inflation | 1.1 | 1.5 | 1.3 | 1.2 | 0.9 | 0.8 | 0.7 | 1 | 1.1 | 0.5 | 0.8 Average monthly USD exchange rate | 524.9 | 506.2 | 499.4 | 514.5 | 512.3 | 514.8 | 528.8 | 539.2 | 540.8 | 540.0 | 522.5 Change in the USD exchange rate | 0.98 | -3.55 | -1.36 | 3.03 | -0.42 | 0.48 | 2.71 | 1.99 | 0.28 | -0.15 | -3.24