NBU hikes policy rate 1pp to 17%

The National Bank of Ukraine (NBU) hiked its key
policy rate to 17.0% from 16.0% starting March 2, as reported in its press release
on March 1. The NBU raised its interest rate at its fourth consecutive meeting
(from 12.5% in October) in its pursuit of the goal of lowering consumer
inflation to the mid-term target level. In its decision, the NBU cited the
postponement of receiving the next IMF loan tranche and boosted consumer
demand, besides high inflation expectations.

Consumer inflation has already exceeded the NBU’s
forecasted trajectory for this year, accelerating to 14.1% yoy growth in
January and is likely to maintain that pace in February. Besides growing prices
for food and services, fuel has become more expensive owing to rising global
oil prices, coupled with January’s depreciation of the local currency.

The central bank expressed confidence that tight
monetary policy has already helped to lower inflationary pressure. Higher
interest rates for banking operations and UAH-denominated financial instruments
attracted higher foreign capital inflow to Ukrainian securities. This factor,
coupled with boosted exporter revenues, contributed to recent appreciation of
the local currency.

In its statement, the NBU underscored that the current
monetary conditions are “tight enough” to dampen inflation down to the mid-term
target.  However, it could resort to further policy rate hikes if
“fundamental inflationary risks” remain. The NBU believes that its 2018
CPI forecast of 8.9% is still attainable, as well as reaching the target of
4-6% by mid-2019.

In related news, NBU Deputy Head Oleh Churiy told a
March 1 press briefing that gross international reserves increased to about USD
18.5 bln from USD 18.4 bln during February as a result of intensive NBU
interventions on the ForEx.

Evgeniya Akhtyrko: The NBU’s
decision was quite predictable as officials were giving a number of clear
signals that they will continue to hike the rate until the next IMF loan
tranche is definitely secured. Recall, Ukraine’s parliament has yet to approve
a final version a law on the High Anti-Corruption Court, as the government has
yet to agree on a natural gas pricing policy for households to meet the IMF
conditions.

It is important that the NBU reached its decision
amid the growing discontent with the central bank’s policy expressed by populists. These statements spurred
the rumors that the NBU would abstain from hiking the rate, as had been
demanded, in exchange for parliament’s approval to appoint Yakiv Smoliy as NBU head. It’s a positive signal that the NBU
had the nerve to maintain its mandate as independent policymakers.