Tight monetary policy still needed, NBU says

The National Bank of Ukraine (NBU) disclosed more
details of its March decision to keep its key policy rate unchanged at 18%
in  its minutes of the monetary policy committee meeting published on
March 25. They revealed that six committee members called for keeping the key
rate unchanged at 18.0%, while one member called for lowering it by 0.5pp and
one more member was for lowering it by 1.0pp.

All monetary committee members noted that inflation is
slowing in line with the NBU’s January macroeconomic forecast. In February, consumer inflation lowered to 8.8% yoy while core inflation
cooled to 7.8%, which points to lower fundamental
inflationary pressure. In addition, inflationary expectations of consumers are
improving. If these factors remain sustainable, they provide grounds for
softening monetary policy, the committee determined.

Meanwhile, six committee members noted that lowering
the key policy rate in March would be premature. Firstly, tight monetary policy
is still needed for further inflation slowdown. Secondly, the NBU needs to
reinforce its confidence in its policy of inflation targeting. Thirdly, boosted
social payments amid heightened political uncertainty in a year of presidential
and parliamentary elections might worsen inflationary expectations. Finally,
commercial banks might be inflexible in changing their interest rates in
response to a change in the key policy rate at the peak of the political cycle.

The NBU also noted that the recent softening of
monetary policy by the European Central Bank amid a deteriorated macroeconomic
forecast resulted in a negative reaction of financial markets and lowered
interest in emerging markets. This might negatively affect the situation at
Ukraine’s ForEx.

The two members supporting a rate cut in March said
it’s appropriate given the current easing of inflation risks and downward
inflationary trend. They emphasized that a softer monetary policy will give a
positive signal for the economy and banking system. In addition, reducing the
interest rate is important for maintaining economic growth.

Evgeniya Akhtyrko: Despite deciding to avoid lowering the key policy rate, the overall
mood at the committee meeting was quite dovish. Should the downward inflation
trend strengthen in March, the NBU’s scale is likely to tip towards cutting the
key policy rate by 0.5pp at the next meeting on Apr. 25.