Rising inflationary risks suggest keeping key policy rate unchanged, NBU says

The National Bank of Ukraine (NBU) disclosed more
details of its June decision to keep its
key policy rate unchanged at 17.5% in its minutes of the monetary policy
committee meeting published on June 18. It revealed that seven committee
members called for keeping the key policy rate unchanged, while one member
called for lowering it by 0.5pp.

The majority of committee members noted that
inflationary risks have increased since the previous revision of the key
policy rate in April. Keeping the key policy rate at the current level should
restrict the influence of these risks, pushing inflation down to its 2020
target of 5%. Meanwhile, the committee members agreed that the monetary
softening cycle might be renewed if the fundamental inflationary pressure
declines and inflationary expectations improve.

Accelerating consumer demand is the highest domestic
risk, the NBU said. Retail continues to grow fast, while wage growth hasn’t
slowed, contrary to its expectations, the NBU noted. The demand is also fueled
by ever-increasing consumer crediting.

Some committee members were less optimistic regarding
the prospect for getting IMF financing because of the uncertainty regarding the
formation of the new government and budget procedure. Given peak repayments on
external debt in the fall, this situation might result in increased volatility
on the ForEx, the NBU noted.

Evgeniya Akhtyrko: We expect the central bank to suspend its monetary softening cycle
until a positive decision by the IMF on resuming financial assistance to
Ukraine, which is not likely to happen earlier than October. We also expect
that the inflationary pressure is not likely to lower significantly during the
summer months, being fueled by a disproportion between demand and supply for
key consumer goods.