Higher key policy rate needed for restraining inflation, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its April 14 decision to hike the key
policy rate by 1.0pp to 7.5% in the minutes of its monetary policy committee
meeting published on April 26. They revealed the decision was taken unanimously
by all ten committee members.

The committee members noted that consumer inflation
continued to accelerate faster than they expected. In March, annual consumer inflation reached 8.5% yoy, while
January’s NBU forecast expected it at 7.6% yoy. On the one hand, the
inflationary pressure was caused by temporary external factors (e.g. higher
than expected global prices for energy resources and food). On the other hand,
the fundamental inflation pressure was reinforced, as reflected by higher core
inflation.

The committee members unanimously supported the
decision to hike the key policy rate to 7.5% as a necessary action for curbing
inflation and returning it to the 5% target in 1Q22. The key policy rate which
exceeds the one in January’s forecast will be a clear signal to the market
about the central bank’s intention to see inflation in the target range.

The NBU expects that the higher key policy rate will
draw up the interbank interest rates and the interest rates for corporate
deposits. The hike of interest rates for deposits of the population is expected
by the middle of the year. This will partially redirect consumer demand to
banking deposits and thus alleviate its pressure on inflation.

The majority of committee members believe that two
recent consecutive hikes of the key policy rate will be sufficient for reaching
the consumer inflation target in 1Q22. At the same time, some committee members
noted that the inflation pressure might be underestimated due to high
uncertainty, and that further hikes of the key policy rate might happen.

Evgeniya Akhtyrko: We don’t expect the trend of consumer inflation in the upcoming months
to be much different from the NBU’s forecast. Therefore, the NBU’s plan to keep
its key policy at 7.5% through the year-end is not likely to change.