Fiscal and monetary support needed for economic recovery, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its Apr. 23 decision to cut its key policy rate by 2.0pp to
8.0% in the minutes of its monetary policy committee
meeting published on May 4. They revealed that all ten committee members
unanimously spoke for the further softening of monetary policy.

The committee members heavily discussed the current and
potential impact of the coronavirus pandemic and quarantine restrictions on
Ukraine’s economy and global commodity markets. The quarantine restrictions
constrained business activities, negatively affected production, employment and
personal income. The committee members agreed that fiscal and monetary support
is needed for economic recovery.

The NBU’s officials noted that the current situation
considerably differed from previous crisis episodes. The initial shock, which
includes the situational hryvnia appreciation and panic buying of some consumer
goods, was moderate and short-lasting. The NBU believes that the clean up of
the banking system, fiscal consolidation, floating exchange rate and more
proactive monetary policy were the factors that helped to withstand the shocks
effectively.

While all committee members agreed about the need for
further monetary softening, their opinions on cutting the key policy rate
ranged. Three members were for cutting the key policy rate by 1.0pp, two
members spoke for a 1.5pp cut, and four members insisted on a 2.0pp cut.
Finally, one member was for a radical cut by 2.5pp to 7.5%.

The committee members believe that the current
weakness of consumer demand is underestimated, and this is resulting in a
further slowdown of consumer inflation. The key
policy rate cut by 2.0pp should be an adequate action to demonstrate that the
NBU is ready to stimulate economic growth by monetary tools.

The committee members currently have different visions
regarding the key policy rate forecast. Three members believe that the key
policy rate should stay at 8.0% through the year end. Two members are sticking
with the previous forecast, which assumes that the key policy rate will be at
7.0% at the year end. Five members would let the key policy rate to go below
7.0% by the end of 2020.

Evgeniya Akhtyrko: For the time being, the lower key policy rate has quite a symbolic
meaning for the economy. Given the high uncertainty of the current economic
situation, Ukrainian banks will not rush with originating new loans, no matter
the NBU’s guidance on the direction of interest rates. The jump of interest rates on local bonds
at the recent auction also
support the opinion that the current economic risks are viewed by the market as
high.