Ukraine central bank lowers key policy rate to 10%

The National Bank of Ukraine (NBU) announced on Mar.
12 that it lowered its key policy rate by 1pp to 10%, citing its board decision
that day. The central bank said it’s continuing its monetary softening cycle in
order to return consumer inflation to the target range of 4-6% and maintain
sustainable economic growth amid global economic cooling. The NBU noted that
inflationary pressure is being exhausted faster than expected. In February,
consumer inflation of 2.4% yoy was below
the target range of 4-6% yoy.

 

Fast inflation cooling is a result of the hryvnia’s
appreciation in 2019, the increased supply of raw food products and lower
prices for energy resources. These factors offset the effect of strong consumer
demand caused by continued growth of individuals’ real income growth. The NBU mentioned
that its consumer inflation forecast of 4.8% YTD in 2020 might be revised
depending on the situation.

 

The outbreak of the coronavirus infection has had a
limited or neutral effect on Ukraine’s economy so far, the central bank said.
However, the uncertainty related to the virus and the growing turmoil at the
financial markets resulted in deteriorated confidence and increased nervousness
at Ukraine’s forex. The central bank believes that the effects of the
coronavirus outbreak have yet to be revealed in Ukraine’s economy.

 

The key assumption of the NBU’s forecast is Ukraine’s
continued cooperation with the IMF.  The new program will lower the
vulnerability of Ukraine’s economy during this period of turbulence at the
global markets. In addition, investors’ attitudes towards Ukraine will depend
on the decision of Ukrainian courts on the obligations of insolvent banks’
former owners to the state, the NBU press release stated.

 

As previously, the National Bank expects to lower its
key policy rate to 7.0% by the end of 2020.

 

Evgeniya Akhtyrko: The NBU’s
decision to lower its key policy rate is quite ambiguous. In our opinion, the
central bank wasn’t convincing when stating that the monetary softening will
maintain economic growth in the current situation of high uncertainty.

 

We believe that recent negative developments at the
global markets, and grueling situation at Ukraine’s forex,
are sufficient factors for suspending monetary softening, or even tightening
policy. In addition, the NBU preferred to play down the growing uncertainty regarding Ukraine’s deal with the IMF.

 

One of the possible explanations of the NBU’s stubborn
adherence to its plans to lower the key rate is political pressure from the
Ukrainian president. Namely, in his interview with Bloomberg News last week,
President Zelensky said that he is waiting for the NBU to deliver on some of
their agreed upon actions.  “If they give us that, it means they’re
efficient,” he said, also hinting that he won’t replace efficient officials.

 

In our view, lowering the key rate is among the
agreed upon actions (the NBU’s plan, published in February, was to lower the
key rate by 1pp in March and by 0.5pp in each of the next six monetary meetings
in 2020).