High consumer demand is major inflation factor, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its September decision to cut its policy rate by 0.5pp to 16.5%
in its minutes of the monetary policy committee meeting published on Sept. 16.
It revealed that seven committee members agreed on lowering the key policy rate
by 0.5pp, while one member called for cutting it by 1pp.

The committee members noted the main macroeconomic
trends that were identified during the previous committee meeting remain
mutually balanced in terms of the NBU’s inflation forecast. In particular, fast
growth of wages, alongside consistently rising consumer demand, create a
significant inflation risk, they noted. At the moment, they don’t see any
signals for a slower growth pace of wages and consumer demand.

At the same time, the hryvnia’s appreciation and
declining prices for natural gas and oil might have a higher disinflationary
effect than the NBU expected in its July macroeconomic forecast. The central
bank emphasized that continuing cooperation with the IMF is the key assumption
of its forecast. So, the renewed talks with the IMF should not
be considered as an additional factor for a faster cut of the key policy rate.

Discussing the factors that might influence the future
trend of the key policy rate, the committee members noted that the
implementation of economic and legislative initiatives of the new government
might result in an improved investment climate and economic conditions, and
consequently boost economic growth potential. Should the developments be more
positive than expected in July’s forecast, more intense monetary softening is
possible already in the current year. However, this should impact the intensity
of monetary policy to a greater extent next year.

Evgeniya Akhtyrko: In these
minutes, the NBU pays tribute to the new government’s initiatives on
intensifying economic growth and improving the investment climate. However, it
prefers a “wait and see” approach before making the relevant implications to
its monetary policy.

By and large, the next two revisions of the key
policy rate on Oct. 24 and Dec. 12 will demonstrate the NBU’s assessment of the
new government’s economic policy. If the initiatives look sustainable and
promising, the NBU should resort to deeper cuts of its key policy rate.