Growing uncertainty affects monetary policy, NBU states

The National Bank of Ukraine (NBU) disclosed more
details of its Oct. 21 decision to keep its key policy rate unchanged at 6.0%
in the minutes of its monetary policy committee meeting published on Nov. 2.
They revealed that nine out of ten committee members spoke for keeping the key
policy rate unchanged.

 

All committee members noted the increased uncertainty
related to the further development of the COVID-19 pandemic and its impact on
economic processes. The renewal of the global economy is continuing, but the
higher incidence rate is hindering the process. Some countries are reinforcing
quarantine restrictions and reintroducing lockdowns.

 

The changes in consumer and investor behavior might
result in more continuous cooling in both the global and domestic economies.
However, it is difficult to make an adequate assessment regarding the extent
and the power of the pandemic’s effect on economic and inflation processes.

 

The committee also pointed to the uncertainty related
to the impact of fiscal parameters in 2020-2021, as well as the proceeds from
the international financial institutions. These factors might significantly
impact the inflation trend in 2021-2022. 

 

Most of the committee members believe that the renewal
of consumer demand and business activity will go on. This, coupled with hryvnia
devaluation and higher prices for energy resources, will result in growth of
consumer prices. The NBU expects consumer inflation to reach 4.1% YTD in 2020.
In 2021, inflation will temporarily go beyond the upper bound of the 4-6%
target range.

 

Nine out of ten committee members agreed that the key
policy rate should stay unchanged at 6% given significant uncertainty and inflation
risks. The NBU assumes that the increasing risks will prevent the commercial
banks from lowering interest rates both on credits and deposits. In addition,
the banks’ expectations regarding the quality of loan portfolios remain
negative.

 

The risk mark-up in the structure of credit interest
rates is increasing. In particular, interest rates for government bonds have
increased recently, and this resulted in a growing gap between the interest
rates for government bonds and the key policy rate.

 

One committee member spoke for lowering the key policy
rate to 5.75%. The member believes that the deterioration of the pandemic
situation, and possible reinforcement of quarantine restrictions, will
negatively affect the income of the population and will restrain the renewal of
domestic demand. This will have a powerful disinflationary effect, which will
outweigh the other factors.

 

While discussing the forecast of key policy rate, the
opinions of committee’s members were divided. Some members believe the key
policy rate should be kept at 6% through the year end, with a possible further
hike in 2021, given the expected inflation risks. The other members believe
that the key policy rate might be lowered in December in order to stimulate
economic growth amid the pandemic.

 

Evgeniya Akhtyrko: At the moment, we don’t see much chance for uncertainty to decline
through the end of the year. The risks related to the COVID-19 pandemic will
only increase, while the chances to receive the next tranche of IMF financing
in the foreseeable future remain slim amid the evolving constitutional
crisis. That said, we are not
likely to see the key policy rate going below 6% in 2020.