Key policy rate to be hiked in 2021, NBU anticipates

The National Bank of Ukraine (NBU) disclosed more
details of its Jan. 21 decision to keep its key policy rate unchanged
at 6.0% in the minutes of its monetary policy committee meeting published on
Feb. 1. They revealed that eight out of ten committee members spoke for keeping
the key policy rate unchanged.

The committee members noted that consumer inflation
rose at the end of 2020 and reached the middle point of inflation target range
of 4-6% yoy. However, inflation is expected to speed up, and it is likely to go
beyond the inflation target range as soon as in January.

The NBU admits that the major factors of inflation
boost are temporary and they are beyond the influence of monetary policy. A
higher key policy rate will not mitigate such current inflation factors as the
lower harvest of 2020, exchange rate effect, higher prices for energy resources
and the hike of housing rates. The influence of these factors will wear off in
2H21 even without the employment of monetary tools, the central bank states.

Two committee members spoke for hiking the key policy
rate to 6.5%. They underscored that the inflation pressure turned out to be
higher than it was expected in the NBU’s macroeconomic forecast last October. A
hike of the key policy rate is inevitable, and now is the time to do it, they
maintained. The proactive position of the central bank would send a signal
about the NBU’s readiness to ensure price stability.

Most committee members anticipate a moderate hike of
key policy rate up to 6.5-7.0% in the next few months. This will alleviate a
fundamental inflation pressure and will improve inflation expectations.
Consumer inflation is expected to return to the inflation target range of 4-6%
in the beginning of 2022.

Meanwhile, some committee members believe that the
hike of the key policy rate will not be needed given the temporary nature of
the current inflation factors and likely compensators like foreign capital
inflow.

Evgeniya Akhtyrko: The next revision of the key policy rate is scheduled for March 4. We
expect the key policy rate will be hiked by up to 100 bps. However, we share
the NBU’s opinion that the current inflation boost is mostly of a non-monetary
nature. Therefore, the hike of the key policy rate would be mostly a symbolic
action.