Ukraine central bank lowers key policy rate by 1pp, upgrades macro forecast

The National Bank of
Ukraine (NBU) announced on Oct. 24 that it decided to lower its key policy rate
by 1.0pp to 15.5% at its monetary policy board meeting that day. The central
bank is continuing its monetary softening cycle as it sees a sustainable trend
of an inflation slowdown to a target of 5% yoy.

 

The NBU noted that September’s inflation of 7.5% yoy turned out to be lower than central
bank projections published in July’s inflation report. The inflation cooling
should continue in October, according to the National Bank’s preliminary
estimate. A fast decline of core inflation is indicating lowered fundamental
pressure on prices. Hard monetary policy fostered the appreciation of the
national currency and improvement of inflation expectations.

 

The National Bank
reiterated its inflation forecast for 2019 at 6.3% YTD, with consumer inflation
expected to reach the NBU’s target of 5% yoy by end-2020. The central bank
emphasized that relatively hard monetary policy conditions will be a key factor
for ensuring the downward inflation trend. Relatively high real interest rates
should maintain the attractiveness of UAH-denominated financial instruments,
making a positive impact on the exchange rate.

 

The central bank
improved its GDP growth forecast to 3.5% yoy in 2019 (vs. 3.0% yoy in July’s
forecast). Ukraine’s economy is expected to increase 3.5% yoy in 2020 and 4.0%
yoy in 2021. The major factors of forecast improvement include more sustainable
domestic demand, increased productivity in agriculture and stronger consumer
confidence. The negative factors include the slowdown of the world economy and
deteriorating trade.

 

The NBU also expects
the current account deficit will shrink to 2.9% of GDP in 2019 due to a high
grain harvest and better terms of trade. In 2020-2021, the current account
deficit will widen due to an expected drop in natural gas transit and a
worsened price situation at the global commodity markets.

 

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 by end-2019.
This should open up other official financing and improve access to the
international financial markets. This will enable maintaining gross
international reserves at USD 23-24 bln despite significant repayments on
foreign debt.

 

The major risks of
the NBU’s forecast include a delay in securing the IMF loan program and
increased threats to Ukraine’s macroeconomic stability related to Ukrainian
court rulings.

 

Evgeniya Akhtyrko: Apparently, the recent alleviation
of the situation around Privatbank was a key factor of the NBU’s brave
decision to cut key policy rate by 1.0pp instead of the more “habiutual” 0.5pp.

 

In this way, the NBU
– as an independent regulator – is sending the message to the government and
the Zelensky administration that it welcomes the recent efforts to stabilize
the situation involving Privatbank and this attitude is expected to be
maintained.

 

The NBU’s
macroeconomic projections are not that different from the base case version of the recently
updated government forecast. No economic breakthrough is expected at the moment.