Ukraine central bank on monetary softening path, minutes reveal
30 July 2019
The National Bank of Ukraine (NBU) disclosed more
details of its July decision to cut its policy rate by 0.5pp to 17.0%in its minutes of the monetary policy committee meeting published on July 29.
It revealed that eight committee members called for lowering the key policy
rate by 0.5pp, while one member called for cutting it by 1pp.
All committee members found the current macroeconomic
conditions supportive for continuing the cycle of monetary softening that was commenced in April. The central
bank believes that despite the projected decrease, the key policy rate in real
terms will remain high enough to reach the inflation target of 5% by the end of
2020. Heightened consumer demand is being compensated by a favorable situation
at the foreign currency market.
The possibility of increased threats to macroeconomic
stability poses the major risk to the NBU’s forecast. Importantly, the central
bank has limited abilities for a quantitative evaluation of such risk and to
mitigate it with the tools of monetary policy. Among such threats, the NBU
mentioned the postponement of key policy reforms, as well as court rulings and
legislative changes that might make the economy more vulnerable and stand in
the way of cooperation with the IMF.
Discussing the further trend of the key policy rate,
the committee members agreed that it will lower to 8% by the end of 2021 given
the absence of major economic shocks. They expect the most rapid decrease of
the rate in 2020, given that inflation reaches the upper end of the target
range (6%) and corresponding improvement in inflationary expectations.
Evgeniya Akhtyrko: The recentlyplummeting interest rates for local bondsimply that the level of key policy rate is still high for the current market
conditions. However, the central bank will closely monitor the newly elected
parliament and the future Cabinet. Further monetary softening is possible only
if the new political establishment will renew substantive negotiations with the
IMF in September.
