NBU expects further hike of key policy rate

The National Bank of
Ukraine (NBU) disclosed more details of its March 4 decision to hike the key policy rate by 0.5pp to 6.5% in the minutes of its
monetary policy committee meeting published on March 15. They revealed that all of the present eight committee members spoke for
hiking the key policy rate.

The committee
members noted that consumer inflation accelerated significantly in the
beginning of the year. As the NBU expected, it exceeded the upper bound of the
inflation target range of 4-6%. Inflation risks strengthened, as global
commodity prices grew faster than previously expected. In addition, the
inflation pressure from Ukraine’s trading partners is increasing because of
economic revival and devaluation effects in some countries.

Six committee
members spoke for hiking the key policy rate to 6.5%, which is in line with the
base scenario of the NBU’s macroeconomic forecast. They noted that the trend of
core inflation is close to projections, and the increment of 0.5pp corresponds
to the expectations at the market.

Two committee
members favored hiking the key policy rate to 7.0%. They argued that the fast
renewal of consumer demand will continue, while the economy will be resilient
to the coronavirus crisis. Hiking the key policy rate by 100 bps would give the
market a signal that the regulator is ready to deter inflationary pressure.

The committee
members agreed that the NBU is likely to hike the key policy rate further in
order to alleviate fundamental inflation pressure and to balance expectations.
Four committee members believe that the key policy rate should be hiked to 7% in
the future and kept at
this level though the year-end. Others  believe that such hike might be
not sufficient and more decisive actions might be needed. All committee members
agreed that the forecast for the key policy rate might need to be updated in
central’s bank economic forecast in April. 

Evgeniya Akhtyrko: The
meeting’s minutes confirm our expectation that the key policy rate will be hiked by up to 100 bps at the next
monetary committee meeting on Apr. 15. Recall, annual inflation in February
landed at 7.2% yoy.