Ukraine central bank hikes policy rate 0.5pp to 17.5%

The National Bank of Ukraine (NBU) hiked its key
policy rate to 17.5% from 17.0% as of July 13 with the goal of bringing
consumer inflation within the target range of 4%-6% by the end of 2019, the
regulator reported in its press release on July 12. In its decision, the NBU
cited heightened risks receiving the next IMF loan tranche, boosted consumer
demand, and active labor migration.

Both consumer and core inflation, which slowed in June to 9.9% yoy and 9.0% yoy
respectively, turned out to be lower than what the NBU projected in its
inflationary report in April. Nevertheless, the regulator believes that
inflationary factors are going to be reinforced and tight monetary policy is needed
to subdue them.

The central bank also kept unchanged its consumer
inflation forecast for 2018 at 8.9% yoy, mentioning that the cooling inflation
observed in May-June will be offset in 2H18 by higher rates for utilities and
public maintenance. The influence of the latter factor will be strong, so the
NBU expects inflation to reach the target range of 4-6% not earlier than 4Q19.

The NBU expects that tight monetary policy will help
to subdue such inflationary factors as rising consumer demand, reducing
interest in Ukraine’s sovereign assets on the global markets and higher
expectations for inflation. The NBU expects annual inflation to slow to 5.8%
yoy and 5% yoy in 2019 and 2020, respectively.

In related news, the NBU reduced its 2018 gross
international reserves forecast to USD 20.7 bln from USD 21.6 bln and revised
downward its 2019 GDP growth projection to 2.5% yoy from 2.9% yoy. Its
projections for GDP growth for 2018 and 2020 were kept unchanged at 3.4% yoy
and 2.9% yoy, respectively.

Evgeniya Akhtyrko: We considered the possibility of a key policy rate hike
in the absence of a clear prospect to secure the next IMF loan tranche. Since
the NBU’s last policy rate review in late May, the government has drawn closer
towards securing the critical IMF loan tranche, but still not fulfilling all
its conditions, as had been expected for this meeting. In particular, an
agreement has yet to be reached on raising household natural gas prices
to import parity levels.

Should the government fail to satisfy the IMF gas
price requirement in the nearest two weeks, Ukraine is likely to lose the
chance to get any IMF and IFI lending until at least the beginning of 2020.
Without this support, Ukraine will face essential difficulties in meeting next
year its rising foreign debt obligations. Under this scenario, the NBU will
continue to tighten its monetary policy and further hike the key policy rate.