NBU hikes key policy rate to 8.0%, worsens CPI outlook

The National Bank of Ukraine (NBU) announced on July
22 that it had decided to hike its key policy rate by 0.5 pp to 8.0% at its
board meeting that day. This is necessary for returning inflation to the target
of 5% yoy in 2022 and controlling inflation expectations amid substantially
increased fundamental inflation pressure.

In June, consumer inflation stayed unchanged from the
previous month at 9.5% yoy while core inflation accelerated to 7.3% yoy. These
results exceeded the NBU’s forecast published in April. The NBU noted that
fundamental inflation pressure strengthened due to increased production costs
coupled with high consumer demand.

Given the fast growth of global prices and further
renewal of consumer demand, the NBU revised its forecast of consumer inflation
to 9.6% from 8.0% YTD in 2021. The central bank expects consumer inflation to
exceed 10% yoy in upcoming months. Then, the trend will halt, with the arrival
of the new harvest and stabilization of global prices for energy resources. In
addition, a tighter monetary policy will help to curb inflation expectations
and gradually alleviate the fundamental inflation pressure. As a result,
consumer inflation will reach the target of 5% yoy in 2H22.

The NBU kept unchanged its GDP forecast of 3.8% yoy
growth in 2021 and around 4% yoy growth in 2022-2023. The regulator expects the
current account to return to a slight deficit of 0.4% of GDP in 2021. In
2022-2023, the C/A deficit will enlarge significantly due to growing consumer
demand amid worsened terms of trade.

IMF cooperation is a major assumption of the central
bank’s forecast. The NBU emphasized that the postponement of the deal creates
risks to budget gap financing. It also might worsen inflation expectations,
thus making the regulator tighten its monetary policy. With IMF financing, the
NBU expects its international reserves to stay at around USD 29-31 bln in
2021-2023. The major risks to the macroeconomic forecast include the strengthening
of quarantine restrictions both in Ukraine and globally, as well as a more
substantial spur of world inflation.

The updated NBU forecast assumes a further hike of the
key policy rate to 8.5% with it staying at this level through 2Q22. Recall, the
previous forecast assumed the key policy rate was to stay at 7.5% through the end of 2021.

Evgeniya Akhtyrko: Accelerated
core inflation was likely the major factor which made the NBU give up its
intention to keep the key policy rate at 7.5% through the end of the year. An
updated forecast of consumer inflation implies that the NBU doesn’t expect
monthly deflation in July-August, which is typical in Ukraine amid the seasonal
increase of the agricultural supply.

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.