Tight monetary policy restraining inflation, NBU says

The National Bank of Ukraine (NBU) disclosed more
details of its January decision to keep the key policy rate unchanged at
18% in  its minutes of the monetary policy committee
meeting published on Feb. 11. They revealed that eight committee members called
for keeping the key rate unchanged at 18.0%, while only one member called for
lowering it by 0.5pp to 17.5%.

The monetary committee members noted that keeping the
key policy rate at 18.0% addresses the need to control inflation and reach the
mid-term inflation target of 5% yoy in 2020. The NBU still sees risks that
could prevent inflation from cooling to levels assumed by the central bank’s
forecast. In particular, the central bank cited uncertainty related to the
election process, which might result in worsening inflationary pressures.

In addition, the majority of the committee noted that
the current tight monetary policy should be able to counteract fundamental
inflationary pressures. The decline of core inflation is slow amid high
consumer demand fueled by fast-growing wages. The worsening terms of trade,
geopolitical risks, and uncertainty in the gas transit sphere in 2020 were
mentioned as major external risks to its inflation forecast.

The committee members don’t rule out the possibility
of a key policy rate hike in case the fundamental inflationary pressure rises
or other pro-inflation risks emerge.

Nevertheless, the committee sees a number of positive
factors that could serve as a basis for cutting the key policy rate. They
include more lending under a new IMF-Ukraine financing program,
a favorable situation on the foreign currency market, renewed interest of
foreign investors in Ukraine’s government securities, and lower prices for
imported energy resources. The positive results of a lowered key policy rate
include the revival of crediting and a reduced deficit in the balance of
payments.

The only committee member who spoke out for lowering
the key policy rate said the implemented monetary policy has already restrained
inflation. Meanwhile, a lowered interest rate would be a positive signal for
the market to improve its expectations.

Evgeniya Akhtyrko: January consumer inflation cooling to 9.2% yoy is likely to add more arguments for lowering the key policy rate during
the next committee meeting on Mar. 13. Should the downward inflation trend
strengthen in February, the NBU is likely to resort to cutting its key policy
rate by 0.5pp.