Inflationary pressure weakened faster than expected, NBU states

The National Bank of Ukraine (NBU) disclosed more details
of its December decision to cut its policy rate by 2.0pp to 13.5%
in its minutes of the monetary policy committee meeting published on Dec. 23.
It revealed that committee members unanimously agreed on the need for more
intense ease of monetary policy.

While justifying its decision, the committee members
emphasized that fundamental inflationary pressure is weakening faster than
expected. In November, consumer inflation lowered to 5.1% yoy.
This means that the NBU reached its mid-term inflation target of 4-6% yoy
several months earlier than it expected in its macroeconomic forecast.

The favorable situation at the currency market was
also a factor. The NBU stated that hryvnia’s appreciation was the key factor
that altered the inflation trend.  Some committee members believe that the
impact of the exchange rate on consumer inflation revealed itself earlier and
stronger than had been expected. The decline of global prices for energy
resources and enlarged supply of some food products were cited as additional
factors of inflation cooling.

The committee members believe that the monetary
softening will support economic growth without interfering with inflation
stabilizing at the level of 5% yoy. Meanwhile, a stricter monetary policy might
result in excessive appreciation of the exchange rate, causing imbalances in
the economy.

Six out of ten committee members spoke for cutting the
key policy rate by 150 bps to 14.0%, while four other members advocated a more
drastic reduction of 200 bps to 13.5%. The latter group emphasized the need for
a more aggressive reaction to lowered inflationary pressure and long-lasting
hryvnia appreciation. Such a decision should also lower the risk of inflation
dipping below the target range.

Evgeniya Akhtyrko: The NBU board, which is the final decision-maker on the key policy
rate, opted for more decisive monetary softening compared to the majority of
monetary policy committee members, who preferred a dovish approach. As we wrote, this decision was an adequate reaction to
unexpected changes in the economy. The NBU should upgrade its forecast of the
key policy rate in January in order to account for recent developments.