Ukraine central bank keeps key policy rate at 18%

The National Bank of Ukraine (NBU) announced on March
14 it decided not to change its key policy rate at its monetary policy board
meeting that day, keeping it at 18.0%, or the same level since July. The
central bank emphasized that tight monetary policy is an “important
precondition” for lowering annual inflation to the target of 5.0% in 2020,
according to its press release. The NBU noted that in January-February,
consumer inflation continued to slow in line with the trend projected in its
January inflation report. In February, inflation cooled to 8.8% yoy while core
inflation slowed to 7.8% yoy, indicating reduced fundamental inflationary
pressure.

The NBU stated its concern about recent rising of social payments, coupled
with the government’s decision on monetizing housing subsidies (switching to
direct cash compensation to subsidy recipients instead of compensation to
utility providers). While the individual effect of these factors are not
significant, in combination they might affect the public’s inflationary
expectations, especially amid rising uncertainty related to two major elections
scheduled for this year. 

At the same time, the central bank cited continued
appreciation as an inflation restraining factor. The regulator believes that
its previously identified risks that could disrupt projected
inflation rates are still valid.

The NBU noted that it sees the possibility for
lowering the key policy rate in the future. Reduced inflation risks, coupled
with better expectations, should be the key factors for this action. The
decision-making on the key policy rate will be based on the NBU’s macroeconomic
upgrade to be published in April.

Evgeniya Akhtyrko: The NBU
preferred not to rush to soften monetary policy, although the confident
downward inflation trend of recent months raised expectations that the key
policy rate might be lowered this time. Apparently, the regulator wants to make
sure that monetizing subsidies and raising pensions will not result in the
inflation trend deviating from the projected one.

If the NBU keeps the same inflation projections in
its forecast update in April, it will likely decide to lower the key policy rate
at its next monetary policy board meeting on Apr. 25.