Gross reserves sufficient to counteract exchange rate volatility, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its March 11 decision to cut its policy rate by 1.0pp to 11.0%
in its minutes of its monetary policy committee meeting published on Mar. 23.
They revealed that eight out of ten committee members spoke for further
softening of monetary policy.

The committee was concentrated on the reaction of the
world commodity and financial markets to the coronavirus outbreak, as well as
the consequences for Ukraine’s economy and monetary policy.  At the time
of the meeting, the coronavirus effect on Ukraine’s economy was assessed as
“limited and neutral”.

However, the outbreak’s lasting effect might result in
a global economic recession and significant slowdown of economic activity in
Ukraine, committee members said. Unlike the previous crises in 2008-2009 and
2014, Ukraine is now better prepared, the central bank believes, as the economy
and financial system have no accumulated imbalances.

Committee members also noted that the increasing
volatility at the global markets affected the confidence of participants in
Ukraine’s forex. The worsened expectations resulted in elevated demand for
foreign currency and increased devaluation pressure. The committee members believe
the situation at the forex remains controllable and the international reserves
accumulated in the prior year are sufficient for smoothing out the spikes in
the exchange rate.

Seven out of ten committee members were for lowering
the key policy rate by 100 bps to 10.0%, seeing the sense in following the
projected trend of high uncertainty. One member spoke for lowering the key
policy rate by 150 bps to 9.5%, noting that this might be a positive signal for
the market.

Finally, two members were for keeping the key policy
rate unchanged at 11%, arguing that the monetary softening should be suspended
because of increased risks to financial stability.

Evgeniya Akhtyrko: The NBU underestimated the risks related to the fast spread of the
coronavirus around the world, as well as the ability of national governments
and medical systems to combat the pandemic. It’s clear now that the severe lockdown measures introduced
by the Ukrainian government will
have a strong negative effect on the country’s economy, even setting aside the
growing deterioration at the global markets. We expect the NBU to tighten
monetary policy given the risks related to the coronavirus outbreak.