NBU considers current monetary policy tight enough

The National Bank of Ukraine (NBU) disclosed more
details on its latest decision to hike the key policy rate by 1pp to 17% in minutes
published on its website of the monetary policy committee meeting on March 1.
The minutes reveal that all eight present committee members agreed on the need
to raise the key policy rate for the fourth time in order to reach the
inflationary target in the mid-term.

Six members spoke out for raising the rate by 100 bp,
while one member was for two consecutive hikes by 50 bp, and another one
suggested a hike by 75 bp. The committee hadn’t seen any “events that would
alleviate inflationary pressure” since the previous hike of the key policy rate on Jan. 25.
All inflationary risks remain relevant, it said, including the postponement of
the next IMF loan tranche, high inflationary expectations and increasing
consumer demand.

All the committee’s members agreed that “the next hike
in April is not apparent”. This position was different from January’s meeting,
when most members shared the opinion that another consecutive hike is very
likely. Instead, the NBU warned that the rate might be raised unless
significant signs of lowering inflationary pressure are observed.

In the NBU’s opinion, January’s hike of the interest
rate stimulated foreign capital inflow to the country. At the same time, the
central bank is aware that the recent capital inflow was mostly channeled to
short-term debt securities, which might pose some risks to the external sector
of the economy.

It was also mentioned that the hike of the key policy
rate drove bank interest rates on retail deposits higher. However, banks are
reluctant to adjust interest rates on longer deposits to avoid the losses in
net interest income.

Evgeniya Akhtyrko: The key policy rate of 17% leaves a significant gap to the February’s
consumer inflation of 14% yoy. So far, we do not see risks of inflation accelerating during 2018.
That said, we see only very negative developments in Ukraine-IMF talks
regarding the next loan tranche will prompt the NBU to resort to another key
policy rate hike in the next meeting scheduled for April 13.