Increased external risks call for tighter monetary policy, NBU says

The National Bank of Ukraine (NBU) disclosed more
details of its Sept. 6 decision to increase its key policy rate by 0.5pp
to 18.0% in more minutes of the monetary policy committee meeting published on
Sept. 18. The minutes reveal that all ten members of the NBU’s monetary policy
committee, who were all present at the meeting, unanimously agreed on the need
to hike the key policy rate, citing increased external risks. In particular,
eight committee members called for a hike of 50 bps to 18.0%, while two members
were for an increase of 100 bps to 18.5%.

In particular, the committee mentioned the capital run
from emerging markets. Devaluation of national currencies among Ukraine’s
trading partners might result in lower competitiveness of Ukraine’s goods on
external markets. In addition, the overall lower interest of international
investors to emerging markets might impede the access of Ukrainian borrowers to
the global capital markets.

The NBU officials also discussed increased
trade-related uncertainty hurting Ukraine’s exports. Among other risks, the
committee mentioned faster-than-expected growth in consumer demand.

When discussing the recently increasing devaluation
pressure on the Ukrainian national currency, the committee members agreed that
the direct impact on inflation will not be substantial given the fact that YTD
hryvnia devaluation was much lower than the devaluation of trading partners’
currencies.

At the same time, the central bank admits that hryvnia
devaluation pushed inflationary expectations higher. To reduce the volatility
of the exchange rate, the NBU will make interventions on the ForEx, but it will
abstain from the attempts to counteract the major trends.

The committee members agreed that they will further
increase the key policy rate should the situation on the external market
deteriorate and/or other discussed inflationary risks are fulfilled.

Evgeniya Akhtyrko: The minutes
reveal that the committee members didn’t discuss the risks regarding the
expected disbursement of the IMF loan tranche to Ukraine. This implies that
during the Sept. 5 meeting, top NBU officials had positive expectations regarding
the outcome of the IMF mission visit to Kyiv.

The next revision of the key policy rate is scheduled
for Oct. 25. In our opinion, a further rate hike is possible only if the
situation on external markets deteriorates.