Consumer inflation to be below target range in 2020, NBU says

The National Bank of Ukraine (NBU) disclosed more details of its January decision to cut its key policy rate by 2.5pp to 11.0% in its minutes of the monetary policy committee meeting published on Feb. 10. It revealed that committee members unanimously agreed to review the forecasted trajectory of the key policy rate in favor of more intense monetary softening.

The committee members noted that fundamental inflationary pressure is weakening faster than expected. At the moment of the meeting, the consumer inflation in January dropped below the target range of 4-6%, according to NBU estimates. The effect of hryvnia appreciation in 2019, coupled with relatively low prices for energy resources and expected higher production of fruits and vegetables, should restrain price growth this year, keeping inflation below target range, the NBU expects.

Six out of ten committee members spoke for cutting the key policy rate by 200 bps to 11.5%. They emphasized that growth in consumer demand will stay high, being stimulated by accelerating wages and much “deferred consumer demand” related to the crisis of 2014-2015. The aggressive lowering of the key policy rate might result in a surge in consumer inflation in 2021.

Two committee members favored cutting the key policy rate by 250 bps to 11.0%, arguing that a drastic cut in the key policy rate is more appropriate in terms of significant inflation cooling. They noted that the volatility of the exchange rate in January was in “an acceptable range”, and its influence on inflationary expectations will be limited.

This group also noted that a faster cut in the key policy rate should not have an adverse effect on the banking sector in terms of runs on UAH-denominated savings deposits, as the bank’s interest rates will remain high enough to be an attractive investment instrument.

The committee’s remaining two members advocated cutting the key policy rate by 350 bps to 10%, arguing that there are high risks that inflation will be lower than currently projected. Therefore, a drastic cut in the key policy rate would be justified.

Evgeniya Akhtyrko: The NBU board, which is the final decisionmaker on the key policy rate, opted for a more drastic cut, although the majority of committee members favored a softer approach. It’s our view that the intensified monetary softening was the proper reaction of the regulator to inflation cooling faster than expected. Overall, the revealed positions of the monetary policy committee members demonstrate the NBU’s increased confidence in the sustainability of positive trends in Ukraine’s economy.