Increased inflation pressure calls for higher key policy rate, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its July 22 decision to hike the key policy rate by 0.5pp to
8.0% in the minutes of its monetary policy committee
meeting published on Aug. 2. They revealed that six out of eight present
committee members spoke for this decision, while two other members called for a
hike of 1.0pp.

The committee members noted that consumer inflation
stayed at 9.5% yoy in June. It was
higher than expected in the NBU’s forecast in April. On the one hand, this
inflation trend was caused by temporary factors, including the effect of the
low comparative base of the previous year and high
global prices for energy resources and food. On the other hand,
the fundamental inflation pressure increased as well. In particular, core
inflation accelerated to 7.3% yoy (vs. the forecast of 6.8% yoy) as a result of
increased costs of business for raw materials and labor as well as high
consumer demand.

The further increase of inflation pressure was the
reason for hiking the key policy rate. The NBU’s updated forecast assumes that
consumer inflation will be beyond the upper bound of the inflation target range
for the greater part of 2022.

The two committee members who spoke for hiking the key
policy rate by 1pp to 8.5% believe that inflation risks both in Ukraine and globally
are increasing and thus call for harder monetary restrictions. The hike of the
key policy rate by 1pp would be a better signal to the market of the NBU’s
intention to curb inflation with monetary tools.

The majority of the committee members expect the NBU
to hike the key policy rate one more time by 0.5pp by the end of 2021 and to
keep it approximately through 2H22. This should help to control inflation
expectations, alleviate inflation pressure and reach the inflation target of 5%
yoy in 2022.

Evgeniya Akhtyrko: The NBU’s
decision to give up its intention to keep the key policy rate at 7.5%
through the end of the year demonstrates its flexibility as well as the ability
to react quickly in a changed situation. The NBU’s goal to curb consumer
inflation to 5% yoy in 2H22 is ambitious. The latest hike of the key policy
rate will help to understand the effectiveness of monetary tools for handling
consumer inflation in Ukraine.