Monetary policy should stimulate economic revival, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its July 23 decision to keep its key policy rate unchanged at 6.0%
in the minutes of its monetary policy committee meeting published on Aug. 3.
They revealed that seven out of ten committee members spoke for keeping the key
policy rate unchanged.

 

The committee members noted that some economic
indicators point at gradual renewal of the Ukrainian economy. In particular,
business sentiment in trade and manufacturing returned to the pre-quarantine
levels. In June, the renewal in retail continued,
while the decline in imports of consumer goods slowed down. At the same time,
the committee agreed that both consumers and business will be stringent in
their consumption and investment decisions, given the high uncertainty
regarding the further development of the situation with the coronavirus
pandemic.

 

The NBU believes that the inflationary trend turned
around in June. The gradual renewal of the global economy resulted in increased
demand for energy resources and, consequently, in higher prices of fuel. This
will result in price growth for other goods and services. The central bank
predicts that consumer inflation will attain the target of 5% yoy at the end of
2020, and possibly reach 6% yoy in 2021.

 

Seven committee members, who spoke for keeping the key
policy rate at 6.0%, believed this would restrain price growth during the
economic renewal in 2021-2022. At the same time, this policy rate is low enough
for the cost of loans to decline to single-digit levels.

 

The other three committee members – who were for
cutting the key policy rate by 0.5pp to 5.5% – believe that consumer demand
will remain depressed for quite a long time. In their opinion, a “careful”
lowering of the key policy rate will have no negative impact on inflationary
expectations. In their opinion, it will be difficult to overcome the negative
consequences of the crisis without more sound support for monetary policy.

 

While discussing the further trend of the key policy
rate through the year end, five committee members said they expect the key
policy rate to be kept at the current level. Two members assumed the
possibility of raising the key policy rate at the year end. Meanwhile, three
committee members said they see room for a further cut of the key policy rate
in the short term.

 

The majority of committee members agreed that the key
policy rate is likely to be increased in 2021 in response to higher
inflationary pressure. However, the NBU still might give the economy an
additional impetus if the consumer and investment demand renews itself too
slowly.

 

Evgeniya Akhtyrko: The
monetary policy committee was able to maintain a professional discussion and
reach a decision that was not quite in line with the calls by various power brokers
to foster declining interest rates in order to flood the economy with low-cost
credit.

 

However, with the latest reshuffling at the NBU board, the new head Kyrylo Shevchenko is very likely to
secure a loyal majority (three of six board members and the tie-breaking vote)
on the NBU’s executive board. And this increases the risk that the future
decision-making process at the NBU might be more affected by the power brokers
outside the central bank, which will mean the loss of the NBU’s independent
status.