NBU hikes key policy rate to 8.5%

The National Bank of Ukraine (NBU) announced on Sept.
9 that it had decided to hike its key policy rate by 0.5 pp to 8.5% at its
board meeting that day. Tighter monetary policy aims to control inflation
expectations and to return inflation to the target of 5% yoy in 2022.

In July, consumer inflation accelerated to 10.2%
yoy as a result of fundamental and temporary factors. The global prices for
energy resources and food remain high, and this contributed highly to inflation
in Ukraine, the NBU notes.

In addition, the fundamental inflation pressure is
maintained. The economic revival, coupled with reinforced migration pressure
are stimulating the fast growth of wages. The fast increase of personal income
is supporting the high domestic demand as proved by the accelerated growth of
retail trade and high demand for consumer durables.

At the same time, the NBU states that the core
inflation stabilized due to the correction of the price for sunflower oil and
the national currency’s appreciation. The regulator expects inflation to stay
around 10-11% yoy in September-October, and it will go below 10% yoy by the end
of the year.  Next year, the downward trend will continue bringing the
indicator to the target of 5% yoy.

IMF cooperation is a major assumption of the central
bank’s forecast. Keeping up with the IMF program will help to get official
financing from other sources, to lower interest rates for external borrowing,
and to maintain the interest of international investors in UAH denominated
assets.

The key risks to Ukraine’s economy include the
significant reinforcement of COVID-related restrictions both in Ukraine and
globally as well as a longer than expected spike of global inflation.

The regulator is ready to employ additional measures
if the fundamental inflation pressure increases substantially while inflation
expectations get worse.

Evgeniya Akhtyrko: The hike of
the key policy rate was not a surprise given the significant consumer inflation
spike in July. It’s likely to be a signal for the government to increase the
interest rates for local bonds. Hopefully, this will draw the primary local
bond market out of its current lethargy.