Tenge might have taken the plunge after President Vladimir Putin's invasion of Ukraine, but it remains uninfluenced by Russia’s aggressive interest-rate hike as seen by the unchanged borrowing cost on March 9.

Bloomberg reports that the National Bank kept the key rate at 13.5%, but warned that a later increase could still be warranted. Despite a hike of more than three percentage points on Feb. 24, hours after the attack on Ukraine, Kazakhstan’s rate now lags far behind Russia’s 20% benchmark.

The key rate’s “current level already reflects the reaction of the National Bank to the increase in geopolitical risks and the risk of accelerating inflationary processes,” Kazakh policymakers said in the statement. “At the same time, there remains room for further tightening of monetary conditions in the event of further deterioration of the external and internal macroeconomic environment.”

Policy rates in Kazakhstan have tended to be above Russia’s official borrowing costs in recent years. The differential reversed, however, after the Bank of Russia raised its benchmark to the highest in almost two decades in a bid to shield the economy and local assets from the impact of sweeping sanctions. 

Currency Defense

While penalties against Russia’s central bank have kept it from defending the ruble, Kazakh policy makers have continued to intervene to shore up the tenge. The National Bank sold $198.9 million on Wednesday, raising its total interventions to nearly $600 million since Feb. 24. 

The tenge is down about 15% against the dollar this year, second only to the ruble’s plunge of nearly 40%, according to prices compiled by Bloomberg.

While the tenge usually tracks the ruble, it has increasingly decoupled from its Russian counterpart since the war erupted. It’s now gained against the ruble to near the strongest since 2015, when the central bank was forced to shift to a free-floating exchange ra

“There are contagion risks, which in the first instance are being transmitted to Kazakhstan via the correlation between the tenge and the Russian ruble,” S&P Global Ratings said in a report last week, when it affirmed Kazakhstan’s sovereign credit score at the lowest investment grade with a stable outlook. 

The central bank also warned on Wednesday that inflation may exceed its previous forecasts as a result of a weaker tenge and higher consumer prices abroad. Its rates corridor, formed from the overnight deposit and lending rates, was kept at plus or minus one percentage point around the benchmark.

The next rate decision is scheduled for April 25, according to the statement.