Tighter monetary policy probable, NBU warns

The National Bank of Ukraine (NBU) disclosed more
details of its Dec. 9 decision to hike its key policy rate
by 0.5pp to 9.0% in the minutes of its monetary policy committee meeting
published on Dec. 20. They revealed that seven out of ten members spoke for
hiking the key policy rate to 9.0% while three members were for hiking it to
9.5%.

The committee members noted that consumer inflation
expectedly peaked in September and started cooling off in
October-November. However, the inflation decline was slower than expected.
According to the NBU, this is due to a “secondary” impact of global price
spikes on a broader range of goods and services in the Ukrainian market. In
addition, inflation was fed by increased costs of businesses for logistics and
labor.

The NBU noted that the core inflation increases
indicate growing fundamental inflationary pressures. Consumer demand stays
high, while inflationary expectations are getting worse. The increased risk of
Russian military aggression is also a factor for the further worsening of
inflationary expectations.

The seven committee members who spoke for hiking the
key policy rate to 9.0% noted that inflationary risks strengthened, and a tighter
monetary policy is needed to prevent inflation and inflationary expectations
from sticking at higher levels.

The three members who called for hiking the key policy
rate to 9.5%, believe that stronger monetary tightening is needed in order to
achieve the goal of hitting the inflation target rate in 2022. They maintained
that the NBU has been updating its inflation forecast upwards, which indicates
that inflationary pressure has been underestimated. As a result, the proactive
position of the regulator and its ability to curb inflation might be
questioned.

All committee members agreed that achieving the
inflation target of 5% yoy in 2022 will probably call for further tightening of
monetary policy. The majority of committee members spoke for a further hike of
the key policy rate at the upcoming meetings.

Evgeniya Akhtyrko: The
increased pessimism of the NBU’s monetary committee on inflation development is
apparent. The 2021 consumer inflation is likely to exceed the NBU’s forecast of
9.8% yoy, and this will be a sound reason for hiking the key policy rate to
9.5% at the next monetary committee meeting on Jan. 20.