Tight monetary policy helping to target inflation, NBU minutes say

The National Bank of Ukraine (NBU) disclosed more
details of its March decision to keep its key policy rate unchanged at 17% in minutes
of the monetary policy committee published on June 4. The minutes reveal that
all eight present committee members agreed to keep the key policy rate
unchanged as the actual inflation trend corresponds to the forecast published
in the latest inflationary report of April 2018. Tight monetary policy should
help to manage inflation to meet the mid-term target.

The committee members discussed the current growth of
oil prices on the global markets, stating that this should create additional
inflationary pressure in the short term. At the same time, favorable weather
conditions this spring promise a good harvest of grains, early fruits and
vegetables that should subdue any growth of food prices.

Given the better-than-expected GDP results in 1Q18, as well as
the expected good harvest and private consumption revival, the NBU might resort
to an upward revision of its GDP forecast. Meanwhile, the majority of committee
members agreed that the probability of cutting the key policy rate before the
year end is low. It should happen only when clear signs of disinflation appear.

The NBU’s base-case scenario assumes receiving a USD 2
bln loan tranche from the IMF in the nearest future, as well as ongoing
structural reforms. In this case, further liberalization of the currency market
is appropriate for maintaining the economic upsurge. Failure to secure the IMF
tranche in and of itself will not be a reason for a possible key policy rate
hike, the NBU stated. However, the lack of institutional financing makes
Ukraine’s economy and financial markets more vulnerable, given their
increasingly limited access to global capital markets.

Evgeniya Akhtyrko: All
important governing decisions at this point are being discussed in light of
Ukraine’s success in securing IMF financing. The nearest three weeks are
critical for Ukraine’s parliament to adopt the bill creating an independent
anti-corruption court which is the key requirement for receiving the fifth IMF
loan tranche this summer.

A positive sign is that all of Ukraine’s highest power
brokers (including the president, prime minister and parliamentary speaker)
have recently emphasized the urgency of a positive
outcome of Ukraine-IMF talks. We remain that national interests will be placed
higher than protecting oligarchic wealth.

Securing IMF financing should alleviate pressure on
Ukraine’s external accounts. It will also remove the risk of a further key
policy rate hike, bringing more certainty to Ukraine’s financial markets.