NBU keeps key policy rate at 17.5%, citing increasing risks

The National Bank of Ukraine (NBU) announced on June 6
it decided not to change its key policy rate at its monetary policy board meeting
that day, keeping it at 17.5%, or the same level since Apr. 25.
In its press release, the central bank said it believes that this decision will
help to downplay the increased inflation risks and reach the inflation target
of 5.0% yoy in 2020.

The NBU reminded the public that consumer inflation in
March and April exceeded its forecasts. According to the central bank’s
estimate, annual inflation increased further in May after reaching 8.8% yoy in April. Meanwhile,
the NBU mentioned that fundamental inflation pressure has been lowering, as
core inflation has cooled. Inflationary expectations improved as well.

The central bank recalled that the major assumption of
its forecast (consumer inflation of 6.3% YTD in 2019 and 5.0% YTD in 2020) was
further financial support from the IMF. At the moment, IMF talks are suspended
until the appointment of the new government
after early parliamentary elections. With this uncertainty on getting IMF
financing in 2019, the vulnerability of Ukraine’s economy increases, as with
the potential volatility in financial markets.

The NBU also cited rising consumer demand as an
additional inflationary factor. Fast growing wages – as well as the developing
retail, construction and industrial sectors – are boosting private consumption.

The central bank said it might resume its monetary
softening cycle if inflationary risks decline amid consistent improvement of
inflationary expectations.

Evgeniya Akhtyrko: The NBU’s decision on keeping the key policy rate at 17.5% was in line with our expectations. We expect the central bank to suspend its
monetary softening cycle until a positive decision of the IMF on resuming
financial assistance to Ukraine, which is not likely to happen earlier than
October.