Fundamental inflationary pressure lowering, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its October decision to cut its policy rate by 1.0pp
to 15.5% in its minutes of the monetary policy committee meeting published on
Nov. 4. It revealed that committee members unanimously agreed on lowering the
key policy rate by 1.0pp.

While justifying this decision, the committee members
emphasized that fundamental inflationary pressure (core inflation) is weakening faster than was expected
in the NBU’s inflationary report in July. The excessively hard monetary policy
might result in appreciation of the real effective exchange rate, which might
result in the enlargement of current account’s deficit. Meanwhile, lower key
policy rate should stimulate crediting and economic growth.

The NBU believes that the major factor of accelerated
inflation cooling was appreciation of the national currency. The favorable
situation at the currency market, coupled with lowering inflation, positively
affected the inflationary expectations of business and consumers, giving
additional reasons for softer monetary policy.

The committee members also discussed the major risks
related to the updated NBU’s forecast, which assumes annual economic growth of
3.5-4.0% yoy for 2020-2021 and the inflation target of 5% yoy to be reached by
the end of 2020. These risks include delays with securing a new program of IMF financing
and rising threats to macroeconomic stability, which might surface “as a
result of Ukrainian courts’ decisions,” likely referring to rulings and
appeals in Privatbank litigation.

Ukraine’s successful cooperation with the IMF is the
key assumption behind the NBU’s decision to accelerate the cut of key policy
rate. The central bank expects the first IMF loan tranche to be received by the
end of this year. 

Evgeniya Akhtyrko: Ukraine’s
central bank is quite explicit it stressing the importance of getting IMF financing
within specific time limits for maintaining macroeconomic stability in the
country. The steps for achieving this goal are clear.

Firstly, the Ukrainian parliament should adopt the
2020 budget by the end of next week, and this budget should be realistic enough
to satisfy key creditors. Secondly, the Zelensky administration and the
government musn’t fail in demonstrating their efforts for resolving the
Privatbank situation. Thirdly, political leaders should commit to fulfilling
other IMF conditions on reforming the economy and energy sector, as well as
fighting corruption.