Ukraine central bank hikes key rate 1pp to 14.5%

The board of directors of the National Bank of Ukraine
(NBU) announced on Dec. 14 a 1pp increase of its key policy rate to 14.5%
citing recently accelerating inflation and mounting future risks. For 11M17,
CPI grew 12.5% ytd and has already exceeded the NBU inflation forecast of 12.2%
ytd for the total year.

Despite the recent acceleration, inflation is easing
but still remains above projected trajectory, the NBU said in its statement.
The NBU also recognizes that a new set of coming inflation risks, including
higher than anticipated fiscal spending, potentially higher social spending,
delayed IMF tranches, ongoing food price inflation and growing pressure of
emigration on the labor market.

The NBU might consider further hikes in the key rate
in case the fundamental inflation risks are fulfilled. The next board meeting
is scheduled for Jan. 25, 2018.

Alexander Paraschiy: The key rate
currently is linked to domestic economic tendencies only very weakly, as
Ukraine’s inflation is being driven by food prices, which in turn are swayed by
weather conditions and the global markets.

Still, the NBU had little choice but to hike the key
rate amid strong inflation, approaching large fiscal spending (UAH 54.1 bln
cash residuals at the treasury account as of Dec. 1) and mounting depreciation
pressure on the hryvnia.

For the moment, we don’t see how monetary measures
might efficiently curb the unleashed inflation spiral driven by food prices. We
expect consumer prices to stay elevated at least through the first half of
2018. Therefore, we see high risks of a further key rate hike at the start of
2018.