NBU head sees grounds for softening monetary policy

National Bank of Ukraine (NBU) Governor Yakiv Smoliy
sees grounds for softening the central bank’s monetary policy, he told
Ukraine’s parliament on Jan. 17. The policy will be discussed during the next
monetary committee meeting, he said. The decision (to soften) will depend on
macroeconomic trends both in domestic and external markets, he said. “We hope
that the upward trend [of the key policy rate] reached its maximum and will
change toward a downward one,” he added.

Recall, the NBU gradually increased its key policy
rate from 12.5% in October 2017 to 18.0% in September 2018 in order to curb
consumer inflation.

In related news, Smoliy stated that the NBU projects
consumer inflation will not exceed 7% growth in 2019. Meanwhile, the latest
official NBU forecast published in October projected consumer inflation will be
6.3% in 2019. Ukraine’s CPI slowed down to 9.8% yoy in 2018 from 13.7% in 2017.

Evgeniya Akhtyrko: It is quite
unexpected to hear such an optimistic NBU statement, as inflation’s cooling to its one-digit level in December appeared
as a pleasant surprise, rather than the result of a long-term confident trend.
In our view, it is too risky to soften monetary policy unless a slowing
inflation trend extends for at least a quarter. Softening monetary policy also
looks inconsistent with Smoliy’s statement about NBU’s worsening inflation
outlook for 2019, which means a further delay in CPI reaching the mid-term
target set by the NBU at 5.0%.

We expect a heated discussion on the key policy rate
at the next monetary policy committee on Jan. 29-30, and the notion of a hasty
rate cut is sure to draw opponents. The risks of macroeconomic destabilization
in 2019 are very high, and Ukraine’s economy is highly dependent on financing
from international institutions.

During 2018, the NBU’s decisions on the key policy
rate correlated with country’s progress in fulfilling its obligations for
receiving IMF financing. In our view, this approach is likely to be maintained
this year as well. Recall, Ukraine has the opportunity to qualify for IMF
financial assistance of USD 2.5 bln in 2019. The IMF plans two tranches of USD
1.25 bln to be disbursed based upon successful reviews of the Stand-by program
with Ukraine.