NBU lowers key policy rate to 11%, updates macro forecast

The National Bank of Ukraine (NBU) announced on Jan.
30 that it lowered its key policy rate by 2.5pp to 11.0%, citing its board decision
that day. The central bank is continuing its monetary softening cycle in order
to keep consumer inflation at the target rate of 5% and maintain sustainable
economic growth.

 

The NBU noted that consumer inflation cooled to 4.1% yoy in 2019, the lowest
level in the last six years. As a result, the mid-term inflation target of
4-6%, which was declared in 2015, was achieved even faster than expected. The
hryvnia’s appreciation was the major factor of accelerated inflation cooling at
the end of 2019, mitigating the influence of high consumer demand.

 

The central bank forecasted that consumer inflation
will be below the inflation target range of 4-6% during most of 2020. It will accelerate
in 4Q20 and conclude the year at 4.8% yoy. Soft monetary policy, coupled with
prudent fiscal policy, relatively low global prices for energy resources and
increased labor productivity will enable consumer inflation to stay at 4-6% in
2021-22.

 

The central bank also downgraded its 2019 GDP growth
estimate to 3.3% yoy (vs. 3.5% yoy in October’s forecast). Ukraine’s economy is
expected to grow 3.5% yoy in 2020 and 4.0% yoy in 2021 and 2022. Soft monetary
policy will foster accelerated economic growth, the NBU believes. High private
consumption will be the major driving force of economic advancement. Meanwhile,
net exports will be negative with regard to high investment demand of
producers. The central bank expects that the current account deficit will stay
at 3-4% of GDP in the forecast period.

 

The key assumption of the NBU’s forecast is Ukraine’s
continued cooperation with the IMF. The current forecast assumes that the new
loan deal will be completed “in the nearest months.” This financing,
coupled with other international borrowing and continued interest of
nonresident investors in Ukraine’s local debt, will foster the growth of
international reserves. The NBU expects gross international reserves will
exceed USD 29 mln in 2020 (vs. USD 25.3 bln in 2019), with continued growth in
2021-2022. 

 

The major risks of the NBU’s forecast include a delay
in securing the IMF loan program, as well as increased threats to Ukraine’s
macroeconomic stability related to Ukrainian court rulings, regarding obligations
imposed on the former owners of insolvent Ukrainian banks.

 

The National Bank expects to lower its key policy rate
to 7.0% at the end of 2020. A fast reduction in the key policy rate planned for
1H20 should result in the lower cost of loans, both for business and the
public, and will stimulate economic activity, the NBU believes.

 

Evgeniya Akhtyrko: The
reinforcement of monetary softening is the proper reaction of the regulator to
inflation cooling faster than expected. The announced plan to lower the key
policy rate to 7.0% by the year end is solid guidance for the business
community regarding the possible trends in the cost of debt during the year.

 

This decision is a positive signal to investors,
demonstrating the NBU’s increased confidence in the sustainability of positive
trends in Ukraine’s economy.