Most NBU committee members spoke to hike key rate to 11% in January

The National Bank of Ukraine (NBU) disclosed more
details of its Jan. 20 decision to hike its key policy rate by 1.0pp
to 10.0% in the minutes of its monetary policy committee
meeting published on Jan. 31. They revealed that at the Jan. 19 meeting, seven
out of ten members spoke for hiking the key policy rate by 2pp to 11%, two
spoke for 10% and one considered hiking to 12%. The discussion continued on
Jan. 20, when “signs of stabilization on the forex market were observed.” In
light of this, “the risk emerged that an unexpectedly tough reaction by the NBU
might be misinterpreted by market participants and will cause their undesirable
reaction.” Therefore, some NBU board members changed their position on Jan. 20,
which resulted in the board’s final decision to limit itself to a 1pp hike the
same day (the decision is approved by six NBU board members, after a discussion
on the monetary committee, which includes ten members, including all the
members of the board).

The monetary committee members stated on Jan. 19 that
a decisive reaction by the regulator “could prevent a further worsening of
expectations and untwisting of the inflationary spiral.” They also noted that
worsened expectations for the Ukrainian currency, due to the information
environment around potential Russian aggression and increased energy prices,
demands decisive actions from  the NBU.

According to the recent inflation report of the NBU,
its analysts see that the key rate will increase to 11% in March and will stay
so up until December when it will be lowered to 10.5%.

Evgeniya Akhtyrko: While the
1pp increase of the rate was an expected move for us, it is quite surprising to
find out about such a hawkish mood prevailing at the monetary policy meeting.
The hike of key policy rate was expected by the market, but most analysts were
expecting an increase of only 0.5 pp, so the actual hike by 1pp looked like
quite a decisive move.

The refusal to approve the majority’s opinion to hike
the interest rate to 11.0% resulted from the fear of receiving a highly
negative public reaction to the decision. We don’t rule out that the decision
to hike the interest rate by 2pp could have become another destabilization
factor under the current situation of incredibly high geopolitical risks. 
Meanwhile, the influence of the key policy rate on the inflation trend in
Ukraine is limited, and we don’t think that hiking the key policy rate to 11.0%
in January would result in a faster inflation decline against the scenario with
postponing this hike to the next meeting on March 2.

With the minutes and NBU’s inflation report having
been published, market expectations will clearly move toward another 1pp hike
of the key rate in March.