NBU keeps key policy rate at 6.0%, updates macroeconomic forecast

The National Bank of Ukraine (NBU) announced on July
23 it decided not to change its key policy rate at its monetary policy board
meeting that day, keeping it at 6%. The NBU noted that this rate will allow to
restrain inflation during an expected economic revival in 2020-2021, and will
give enough room for pushing the cost of credit down to the single digits.

 

In related news, NBU Governor Kyrylo Shevchenko told a
press briefing on monetary policy the same day the central bank expects to keep
the key policy rate at the current level of 6% through the year end.

 

The NBU noted that consumer inflation continues to accelerate,
but remains under the target range of 4-6%. The central bank attributed the
higher inflation to higher pricing of some raw foods as a result of unfavorable
weather conditions. In addition, inflationary expectations of both the general
public and business deteriorated. Restraining inflation was weak domestic
demand, the favorable situation at the Forex market and relatively low prices
for energy resources.

 

The regulator expects inflation to accelerate to 4.7%
YTD in 2020. The return of consumer inflation to the target range will be
stimulated by soft monetary fiscal policy, which should alleviate the negative
effects of COVID-19 and will stimulate consumer demand and business activity.

 

The NBU downgraded its 2020 GDP forecast to a 6% yoy
drop from a 5% yoy decline. In the following years, the economy will return to
growth of around 4% yoy.

 

Meanwhile, the NBU significantly improved the forecast
of the 2020 current account from a 1.7% of GDP deficit (in April’s forecast) to
a surplus of 4.4% of GDP. The surplus will be prompted by a drop in demand for
durable goods, border closures and low prices for energy resources.

 

As a result of the pandemic, imports will be more
negatively affected than exports, as global demand for food will remain stable,
the NBU believes. In addition, the volume of migrants’ remittances will be
higher than expected previously. After 2020, the current account will be in
deficit as a result of increased consumer demand and the decline in natural gas
transit.

 

The central bank emphasized that the key assumption of
its forecast is the continued IMF cooperation based on the memorandum signed in
May. Consistent monetary and fiscal policies will ensure macroeconomic
stability, which is necessary for stable economic renewal. IMF support is
important for financing budget expenditures, fighting pandemic consequences,
staying current with external payments and having access to the international
financial markets.

 

With IMF support, Ukraine’s gross international
reserves will increase to around USD 30 bln in 2020, and USD 32-32 bln in the
following years, the NBU estimates.

 

The major risk of the NBU’s forecast is an extended
COVID pandemic and the reinforcement of quarantine restrictions, both in Ukraine
and in the world.

 

Evgeniya Akhtyrko: Keeping the
key policy rate unchanged at 6.0% is an adequate decision for the current
macroeconomic situation. If consumer inflation accelerates, a key policy rate
below 6% would bear the risk of entering a range of negative real effective
rates. Moreover, such a decision creates the impression the current NBU board
(at least at this point) is still able to make independent decisions, even if
they are not in line with the unwise intentions of power brokers to foster
declining interest rates in order to flood the economy with low-cost credits.

 

We expect the NBU’s latest decision will bring more
certainty to Ukraine’s financial market, and will reduce the negativity related
to the change of the NBU governor and the growing anxiety about the potential loss
of the NBU’s status as an independent policy maker. Nevertheless, both Ukraine
and international financial communities will keep a watchful eye on the NBU’s
activity, as well as the messages delivered by its top officials.