NBU hikes key policy rate to 7.5%, worsens CPI & GDP outlook

The National Bank of Ukraine (NBU) announced on April
15 that it decided to hike its key policy rate by 1.0 pp to 7.5% at its board
meeting that day. This aims to slow down inflation in 2H21 and return it to a
5% target in 1H22.

 

In March, consumer inflation accelerated to 8.5% yoy
while core inflation reached 5.9% yoy. These results exceeded the NBU’s
forecast published in January.

 

The NBU noted that inflation accelerated mostly due to
temporary factors such as the growth of global prices for food and energy
commodities. At the same time, fundamental inflationary pressure strengthened
because of the further increase of consumer demand spurred by wage growth.

 

Given the fast renewal of the global economy and
reinforcement of inflationary pressure, the NBU revised its forecast of
consumer inflation to 8.0% from 7.0% YTD in 2021. The central bank expects
consumer inflation to peak in 3Q21. Then, the trend will halt, as the supply
from the new harvest will reach the market and the effect of the low
comparative base for some goods wears off.

 

The NBU downgraded the 2021 GDP forecast to 3.8% yoy
real growth from 4.2% yoy growth. Ukraine’s economy is recovering more slowly
than expected previously because of re-implemented quarantine restrictions.
After declining in 1Q21, the economy will return to sustainable growth starting
2Q21, the central bank expects. Consumer demand will remain a major driving
force of economic growth. Investment demand will increase alongside the global
economic revival. In 2022-2023, Ukraine’s economy will grow around 4% yoy, the NBU
forecasts.

 

The regulator expects the current account to return to
a slight deficit of 0.8% of GDP in 2021. In 2022-2023, the C/A deficit will
enlarge significantly due to less favorable price conditions for Ukraine’s
major exporters and the decline of revenue from natural gas transit.

 

IMF cooperation is a major assumption of the central
bank’s forecast. Financing from the IMF and other international partners
reinforces the ability of Ukraine’s government to support the economy during
the crisis and to go smoothly through the peak of debt payment in autumn 2021.
The major risks to the macroeconomic forecast include the reinforcement of
quarantine restrictions both in Ukraine and globally, as well as the low rate
of vaccination in Ukraine.

 

The NBU’s forecast assumes the key policy rate to stay
at 7.5% through the end of 2021. The regulator believes that this rate is
sufficient for returning CPI to 5% yoy in 1Q22.

 

Evgeniya Akhtyrko: The hike of
key policy rate to 7.5% was in line with our expectations.
The NBU’s revisions of the CPI and GDP forecasts is an adequate reaction to the
negative economic developments of 1Q21.  

 

The next revision of the key policy rate is scheduled
for June 17. We don’t expect the trend of consumer inflation in the upcoming
months to be much different from the NBU’s forecast. Therefore, the NBU’s plan
to keep its key policy at 7.5% through the year-end is not likely to change.