NBU commencing cycle of monetary softening, minutes reveal

The National Bank of Ukraine (NBU) disclosed more
details of its April decision to cut its key policy rate by
0.5pp to 17.5% in its minutes of the monetary policy committee meeting
published on May 6. It revealed that eight committee members called for
lowering key policy rate by 0.5pp, while one member called for keeping it
unchanged at 18.0%.

All committee members found the current macroeconomic
conditions supportive for commencing a cycle of monetary softening. The current
sustainable downward inflationary trend corresponds to the NBU’s forecast. At
the same time, elections-related developments didn’t affect the positive trend
in inflationary expectations. The NBU also noted increased investment in
Ukraine’s local bonds by non-residents, which was one of the factors of
national currency appreciation.

The NBU noted that the postponement of lowering the
key policy rate might result in accumulated imbalances in the economy. In
particular, high interest rates might stimulate the inflow of short-term
capital and the enlargement of the current account deficit. At the same time,
softer monetary policy should stimulate interest in government bonds with a
longer term of maturity.

Nevertheless, the committee members discussed the
emergence of new risks. In particular, they emphasized that recent court rulings against the nationalization of
Privatbank might undermine the NBU’s actions
aimed at securing the stability, transparency and efficiency of banking system,
as well as increase the risks to overall financial stability. The NBU also
underscored that political uncertainty poses risks to maintaining its
independent status. Should these risks become realized, Ukraine will lose the
support of its international partners, and its access to financial resources
will be impeded.

Evgeniya Akhtyrko: The NBU is
concerned about exactly the same risks we mentioned in our analysis of the NBU’s decision
to lower the key policy rate. For this reason, we do not expect the central
bank to rush with more rate cuts in the nearest months. Further monetary
softening is possible only if the IMF offers a positive decision on issuing
Ukraine a new loan tranche in the semi-annual review to be completed in May.