NBU hikes key policy rate to 10%, worsens macro outlook

The National Bank of Ukraine (NBU) announced on Jan.
20 that it decided to hike its key policy rate by 1pp to 10.0%. A number of inflationary
risks came into effect, and this calls for a tighter monetary policy in order
to improve the inflationary expectations and bring inflation down to the target
of 5.0%.

In December, consumer inflation slowed to 10.0% yoy
from its peak in September of 11.0% yoy. At the end of the year, inflation
slowed down due to a record high crop harvest, the correction of some global
food prices, appreciation of the national currency and the worn-off effect of a
low comparative base. At the same time, the inflation slowdown  was
hindered by the further growth of world prices for energy, increased production
costs and high consumer demand.

The NBU has revised its forecast for consumer
inflation to 7.7% from 5.0% YTD in December 2022. In particular, the prices for
energy resources will remain high longer than it was expected earlier. This
will put pressure on production costs and will call for the hike of utility
tariffs. High demand for labor will result in faster growth of wages, which
will stimulate consumption.

Ukraine’s GDP increased around 3.0% yoy in 2021,
according to NBU estimates. The renewal of the economy was fostered by stable
consumer demand, the post-crisis increase of investments and a record-high crop
harvest. At the same time, the fast growth of prices for energy and slow
renewal of service sectors are among the factors which prevented a faster
economic revival. The NBU expects Ukraine’s economy to grow 3.4% yoy in 2022
(vs. 3.8% yoy expected in its October forecast). In 2023-2024, it will grow
around 4% yoy.

IMF cooperation is a major assumption of the central
bank’s forecast. Continuing cooperation is critical during this period with its
negative information background formed by the tense geopolitical situation. The
major risks to the macroeconomic forecast include the escalation of military
conflict with Russia and a longer-than-expected surge of global commodity
prices.

The NBU stated that it will continue the monetary
tightening cycle. Moderately tight monetary conditions are expected through the
whole of the NBU’s forecast horizon of 2022-2024.

Evgeniya Akhtyrko: The NBU’s
decision was in line with our expectations. The current downward inflation
trend is not impressive while geopolitical risks are at peak compared to the
last several years. We don’t expect to see a confident downward trend of
consumer inflation in January-February, and another hike of the NBU’s key
policy rate is likely.