NBU keeps key rate at 12.5%, will ease only if inflation levels off

The board of directors of the National Bank of Ukraine
(NBU) said in an Aug. 3 statement that it decided to keep its key rate
unchanged at 12.5%, citing higher-than-expected inflation. The NBU also
reported that its 9.1% inflation forecast for end-2017 is under upside risk,
citing a fast recovery of consumer demand and a possible increase in budget
spending and pension payments in the second half of the year. The central bank
expects that inflation in Ukraine will converge to the middle of its forecasted
range in 1H18, or about 7% yoy. For 2017, the bank is keeping its target
inflation range at 8% +/- 2pp, despite inflation (CPI) reaching 15.6% yoy as of
June. In July and August, the regulator anticipates deflation.

The NBU stated that it will come back to easing
monetary policy only upon receiving clear signals of leveling inflation risks.
Among the key preconditions for that are continuing cooperation with the IMF,
as well as conducting a balanced fiscal policy. The next NBU board meeting to
discuss the key rate is scheduled for Sept. 14.

Alexander Paraschiy: It seems
like the NBU sees a high risk that 2017 inflation will outpace its annual
target range of 6%-10%. We maintain our forecast that CPI will reach 11.8% as
of end-2017, and we see little likelihood that the central bank will downgrade
its key rate in September. We share the NBU’s view that it is critical for
Ukraine to remain within the IMF’s program, also hoping for a positive review
this autumn, with some likelihood of tiny monetary easing after the next IMF
tranche.