Ukraine central bank keeps policy rate unchanged at 14%

The board of directors of the National Bank of Ukraine decided to keep its policy rate unchanged at 14%, the NBU reported on Dec. 8. With its decision, the NBU interrupted a series of six reductions in the policy rate (from 22% at the year’s start) that started on April 22. Increased inflation risks prompted the board members to refrain from the rate cut, said NBU Head Valeria Gontareva, according to the report.

The key drivers of boosted risk are the government’s initiative to double the minimal wage in Ukraine in 2017 (which could add up to 1pp to the inflation rate next year, according to the NBU), rising political uncertainty, and increased risk of delays in official lending to Ukraine, Gontareva said.

The NBU directors will meet again on Jan. 26 to consider revising the policy rate.

Alexander Paraschiy: Back in October, we were expecting a further policy rate cutby the year’s end. However, we agree with the NBU’s evaluation of the current political situation and risks of delays of further tranches from the IMF and other official lenders. The populist decision of the government and parliament to double the minimum wage in January (to UAH 3,200, or USD 120 per month) won’t have such a big effect on inflation, though it can negatively affect Ukraine’s relationships with international lenders.

We believe that a downward revision of the policy rate on Jan. 26 will depend on clarity on IMF financing by that date. However, we are skeptical about any progress with lenders by then.